August 2021 Market Commentary: It’s All About CO-FED

Data Source: Bloomberg

 To read full commentary, click here.

August 2021 Highlights:

  • After an initial weak start of the month, global stocks (MSCI All-Country World Index or ACWI) rallied following a dovish speech from Fed Chairperson Jerome Powell at the annual Jackson Hole Symposium as well as more evidence of peak COVID Delta variant infection rates. The U.S. dollar weakened against major trading currencies in response to the Powell speech arresting the early month appreciation that had financial market participants starting to worry.
  • MSCI ACWI returned 2.5% for the month led by a late month surge in MSCI Japan which returned 3.1% followed by the S&P 500 (+3.0%). After lagging for most of the month, MSCI Pacific ex-Japan and Emerging Markets recovered the last week of August, returning 2.6% and 2.2%, respectively.  After having led the other non-U.S. regions for most of the month, MSCI Europe ended up finishing behind the other regions, returning 1.5% for the month.
  • Within the U.S., U.S. large cap growth stocks outperformed small caps and cyclically-sensitive value stocks. S. small caps underperformed large caps with the S&P 600 Index returning 2.0% behind the 3.0% return of the S&P 500.  S&P Pure Value underperformed Pure Growth, returning 2.8% versus 5.1%, respectively.
  • Despite growth stocks outperforming value stocks, Financials led all U.S. sectors (Figure 14) followed by a combination of growth sectors (Communication, Technology) and rate-sensitive defensive sectors (Utilities, Real Estate). The Energy sector continues to underperform regardless of whether energy commodity prices are rallying or falling.
  • After lagging throughout August, Momentum surged the last week to lead all other factors followed by High Quality while Value, Minimum Volatility, and High Dividend underperformed the broad market.
  • Investment grade fixed income posted a small negative return as long-term interest rates bounced around throughout the month while corporate credit spreads widened prior to the Jackson Hole meeting but then narrowed following the dovish Powell speech. However, corporate bond spreads remain wider than the cycle-low levels reached back at the end of June. The Bloomberg/Barclays US Aggregate Bond Index returned -0.2% as the 10-Year U.S. Treasury yield dropped to as low as 1.25% before finishing the month at 1.31%.
  • Non-U.S. bonds came under some pressure at month-end following stronger-than-expected inflation readings out of Europe. The Eurozone July CPI rose 3% year-over-year while core CPI rose 1.6% which led to a rise in German bund yields and a euro appreciation versus the U.S. dollar.  Comments from ECB officials hinted at moving up the timetable for tapering balance sheet purchases.
  • S. high yield and emerging market debt outperformed investment grade fixed income as risky debt rode the coattails of strong equity performance. The Bloomberg Barclays US High Yield Index returned 0.5% for the month while Bloomberg Barclays Emerging Market Debt (LC) returned 0.9% benefiting from a weakening U.S. dollar.
  • Within equity alternatives, REITs continued their outperformance while Commodities and Precious Metals underperformed equities as oil prices came under pressure throughout the month over lingering concerns on the negative impact to travel demand due to rising COVID infections.  Precious Metals can’t seem to find their legging despite the prevalence of negative inflation-adjusted interest rates.  However, industrial metals recovered from last month’s sell-off to finish at the top end of its 3-month trading range.

 To read full commentary, click here.

By: Benjamin Lavine