May 2021 Market Commentary: Pushing from the Bottom-Up
Data Source: Bloomberg
To read full market commentary, click here.
May 2021 Highlights:
- Capital markets were largely quiet in May as implied volatility across equity and fixed income dropped to complacent levels consistent with pre-pandemic market sentiment. Both U.S. equities and fixed income posted moderate gains while the assets across the rest of the world benefited from a weaker U.S. dollar.
- Global stocks (MSCI All-Country World Index) returned 1.4% primarily driven by non-U.S. market performance (when priced in U.S. dollar terms). MSCI Europe led major region returning 4.2% followed by MSCI Emerging Markets (+2.3%), MSCI Japan (+1.6%) and MSCI Asia ex Japan (1.5%). The U.S. region (S&P 500) lagged the rest of the world, returning 0.7%.
- Both the United Kingdom and Continental Europe are increasingly seen as the next reflationary beneficiaries as COVID-19 vaccination progress has accelerated following delayed rollouts; several of the largest energy and mining concerns are listed in the U.K. and Europe. With increased signs of a credit-driven slowdown from China, investors view Europe (primarily Germany) as driving the next leg of export-driven growth.
- Within the U.S., May witnessed a partial intra-month reversal as investors initially bid up reflationary cyclicals and commodities only to rotate back into high priced growth stocks towards month-end. S. small caps outperformed large caps with the S&P 600 Index returning 2.1% ahead of the 0.7% return of the S&P 500 while S&P Pure Value outperformed Pure Growth, returning 4.8% and -0.9%, respectively, although this relative performance gap had reached nearly 9% earlier in the month.
- S. cyclical and financial sectors outperformed growth-oriented sectors, although most of the major sectors outperformed the broader U.S. market. Energy and materials, benefiting from the commodity price rally, led major sectors as did Financials while Communication Services, Technology, Utilities, and Consumer Discretionary lagged.
- Among risk factors, ‘Momentum’ underperformed all other factors although it made up some ground towards month-end. Value and High Dividend outperformed as investor sentiment shifted back to the reflation trade although this outperformance moderated towards month-end. High Quality and Minimum Volatility performed in line with the broader market.
- Investment grade fixed income posted moderate gains as long-term interest rates rallied from an early-month sell-off. The bond market received reassuring comments from US Federal Reserve officials that inflationary pressures were considered transitory despite April year-over-year headline CPI coming in at 4.2%. The Bloomberg/Barclays US Aggregate Bond Index rose 0.3% benefiting from both a drop in interest rates and continued spread compression across riskier fixed income assets as well as strong bid-to-cover response to this month’s Treasury auctions.
- U.S. high yield continued to enjoy moderate gains as high yield spreads remain near post-pandemic lows. The Bloomberg Barclays US High Yield Index returned 0.3%. Total return gains from further spread compression may be limited going forward as it appears the credit markets may have reached valuation limits on what investors are willing to pay for taking on corporate default risk. Foreign currency and emerging market debt continue to benefit from U.S. dollar weakness as foreign central banks have expressed earlier timetables for tightening monetary policies versus the timetable expressed by the U.S. Federal Reserve.
- Treasury rates dropped as the 10-Year U.S. Treasury Yield ended the month at 1.60% 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 dropped from their recent peaks but remain at elevated levels. The bond markets seem increasingly comfortable with the Fed’s ‘inflation-is-transitory’ narrative.
- Within equity alternatives, precious metals finally benefited from the negative real (inflation-adjusted) rate environment as the GSCI Precious Metals Index returned 7.7%. Commodities also outperformed equities as the GSCI Commodities Index returned 2.5% led by continued rallies in copper and oil, although some of these markets pulled back towards month-end following China’s attempt to crackdown on ‘runaway’ prices. REITs performed in line with the market benefiting from lower interest rates and highly accommodative financial conditions.
To read full market commentary, click here.
By: Benjamin Lavine