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July 2021 Market Commentary: Making Sense of Mountainous Peaks

Source: Bloomberg

To read full market commentary, click here.

July 2021 Highlights:

  • Global stocks (MSCI All-Country World Index) returned 0.7% primarily driven by the U.S. market, with the S&P 500 returning 2.4% followed by MSCI Europe, which returned 1.8% for the month. Pan-Asian and Emerging Markets lagged for the month extending an underperformance streak going back several months.  MSCI Japan returned -1.3% while MSCI Asia ex Japan and Emerging Markets were down 6.6% and 6.7%, respectively.
  • Despite renewed lockdowns and restrictions in response to the Delta Variant, both the United Kingdom and Continental Europe appear to be past peak infection rates as both regions continue to receive investment outflows from Pan-Asia which is still suffering with high infection rates. Pan-Asia continues to suffer from a combination of higher Delta infection rates and spillover weakness from the Chinese equity market sell-off following regulatory crackdowns on technology and property companies.
  • Within the U.S., U.S. large cap growth and defensive stocks outperformed small caps and cyclically-sensitive value stocks. S. small caps underperformed large caps with the S&P 600 Index returning -2.4% behind the 2.4% return of the S&P 500 while S&P Pure Value underperformed Pure Growth, returning -2.2% and 5.2%.
  • Across U.S. sectors, U.S. cyclical and financial sectors underperformed growth-oriented (Health Care) and defensive sectors, led by Real Estate and Utilities, as the latter two benefited from the drop in long-term interest rates. The Energy Sector underperformed despite elevated oil and natural gas prices.
  • Among risk factors, ‘High Quality and ‘Minimum Volatility’ Outperformed ‘Value’, ‘High Dividend’, and ‘Momentum’ as investors gravitated towards growth and defensive stocks and away from cyclical value.
  • Investment grade fixed income posted strong gains as long-term interest rates dropped further from the initial rally following the Fed June Meeting. The bond market received reassuring comments from US Federal Reserve officials that inflationary pressures remain ‘transitory’, and that balance sheet tapering is still a ways off despite strong year-over-year inflation releases.
  • The Bloomberg/Barclays US Aggregate Bond Index rose 1.1% benefiting from the drop in interest rates although non-government investment grade borrowers saw their borrowing costs widen slightly versus government securities. Non-U.S. bonds performed even better benefiting from lower rates (especially in Germany) and a weaker US dollar.  Emerging market debt posted moderate losses but was not overly weighed down by volatility in China’s equity and debt markets.
  • S. high yield underperformed investment grade for the first time in several months but still posted a moderately positive return despite some month-end spread widening. The Bloomberg Barclays US High Yield Index returned 0.4% for the month.  Despite the underperformance of energy stocks, highly leveraged energy borrowers saw a slight increase to their borrowing costs from the previous month, as overall costs remain historically low.
  • Treasury rates dropped as the 10-Year U.S. Treasury Yield ended the month at 1.22% versus 1.75% at the post-COVID peak. The 2- vs 10-year term structure continues to flatten while inflation expectations priced into TIPS have actually risen as investors still expect a moderate amount of inflation to persist.
  • Within equity alternatives, REITs continued their outperformance while Commodities and Precious Metals generated positive returns but underperformed U.S. Equities. Precious Metals saw a month-end rally following dovish Fed comments reaffirming current policy accommodations until pre-pandemic employment levels are achieved.  Industrial metals and commodities appear to have settled in a sideways pattern until more clarity is seen on the demand front.

To read full market commentary, click here.

By: Benjamin Lavine