Clearview Portfolio Consulting August 2021 Market Recap

Key Points:

  • The S&P500 experienced its 7th consecutive month of positive returns with a 3.04% gain in August.
  • Risks to the global economic recovery include new cases of a mutated coronavirus, tension in the middle east and inflation remaining stubbornly high.
  • The Federal Reserve is discussing tapering its bond buying program and raising rates to hold off an overheating economy and corresponding inflation.

The threat of a mutated coronavirus slowing economic growth, tensions in Afghanistan and another month of higher inflation were no match for global stocks in August. The S&P500 posted its third best return of the year, gaining 3.04% and continuing its streak of 7 consecutive positive monthly returns since February. Low interest rates and strong corporate earnings continue to propel the index to new highs. Growth stocks drew investor demand as the Russell 1000 Growth gained 3.74% for the month. Financials (+5.14%) were the strongest sector as bond yields moved higher while energy stocks (-2.04%) were the only negative sector in the S&P500. OPEC’s plan to gradually increase production and the threat of a slower economic opening in the US weighed on energy prices. Small cap stocks rebounded after a brief selloff in July. Through the first 8 months of the year the S&P500 has gained 21.58% while the Russell 2000 is up 15.83%.

International markets were modestly higher with the MSCI EAFE gaining 1.76% in US Dollars. Emerging markets rebounded from a tough July when investors were spooked by a tech crackdown by the Chinese government. A resurgence of Covid infections in Asia have caused ports to close and economists to rethink global economic growth forecasts. Supply chain bottlenecks coupled with a resurgence in demand could keep inflation around longer than the Fed wishes.

The bond market detracted as Treasury yields climbed in August. The Bloomberg Barclays US Aggregate Bond index lost 0.19% for the month and is down 0.69% for the year. All eyes are on how the Federal Reserve will taper its monthly bond buying program which started at the onset of the pandemic. If inflation continues to remain high, the Fed could then begin raising rates to cool down the economy. Economist from Prudential do not think that will occur until the second half of 2022 at the earliest while Nuveen Investment Management believes that rate hikes will not begin until 2023 unless inflation runs rampant.

Sources: Morningstar Direct, Wall Street Journal, Prudential, Nuveen

Clearview Portfolio Consulting July 2021 Market Recap

Key Points:

  • The S&P500 continued its march higher in July, gaining 2.38% and almost 18% for the year.
  • Large cap growth stocks have come back into favor over the past few months as investor concerns over delta variant coronavirus spread plagued the news.

Chinese stocks dropped almost 14% in July after the communist government cracked down on technology and education firms.

U.S. stocks edged higher in July with the S&P500 gaining 2.38%, it’s 6th consecutive month of positive returns. Strong corporate earnings this year have pushed the index to an impressive 17.99% through July. Healthcare stocks (+4.9%), real estate (+4.64%) and utilities (+4.33%) were the strongest performers while energy (-8.27%) and financials (-0.44%) had negative returns. Growth stocks came back into favor while value and small caps underperformed the broader market. A rise in delta variant coronavirus cases has created uncertainty as to whether additional lockdowns may be implemented. U.S. GDP growth in the 2nd quarter was strong at 6.5%, but below consensus expectations of 8.4%.

After a decade of low inflation, prices in everything from gas to groceries to houses have gone up this year. The Federal Reserve maintains that these price increases will likely be “transitory” as supply chain disruptions and pent-up demand recede. The U.S. Bureau of Labor Statistics reported that inflation increased 5.4% on a year-over-year basis in June. While it seems counterintuitive, bond yields moved down in July with the 10-year Treasury yield ending the month at 1.24%. The drop in yields may be investor concerns on the economy, profit taking in stocks, but also the Fed maintaining low rates and monthly asset purchases of $120B to provide liquidity the markets. The Barclays US Aggregate Bond Index gained 1.12% in July, it’s best month over the past year. Bond prices move in the opposite direction of yields.

International markets were mixed with developed markets gaining 0.75% while emerging market stocks lost 6.73%. China, which is the biggest weight of emerging markets, dropped 13.84% as the communist party implemented strict regulations on technology companies and forced education and tutoring firms to become non-profit “for the greater good”. While the Chinese economy continues grow and remain integrated within the global economy, the political risk and policy uncertainty associated with investing there is a reminder of the risks involved with investing in emerging markets.

Sources: Morningstar Direct, Wall Street Journal, JPMorgan

Clearview Portfolio Consulting Mid-Year Outlook

As we embark on the second half of 2021, both the US economy and stock market continue to strengthen at a rapid pace.  The Congressional Budget Office expects the US economy to grow by 7.4% this year with strong corporate earnings fueling further gains in employment.  The US economy continues to re-open and normalize while pent up demand in consumer goods and travel and leisure is pushing prices higher.  According to JPMorgan, the total number of jobs currently available is closing in the total number of unemployed Americans. 

Strong economic activity has been bullish for equities as the S&P500 has climbed 15.25% for the first half of this year as investors have focused on cyclical stocks over defensive ones.  Energy stocks (+45.6%) surged this year as oil prices rebounded to meet rising demand, while utilities (+2.38%) have lagged.  Technology stocks came back in favor in June, gaining 6.95% after lagging the broader market this year.  Steep valuations and potential government regulation have given investors pause after the sector led the market higher for much of 2020.  Small caps, which tend to do well when the economy is strong, have outpaced large caps, gaining 17.54%. Overall, risk taking has paid off for investors as the market has experienced low volatility levels in the first six months of 2021. There has been only 4 days where the S&P500 closed +/-2%.  The summer months may see higher levels of volatility where there tends to be liquidity, potentially higher unexpected inflation and new COVID variant threats.

Inflation is rising as demand is picking up in many areas of the economy.  Higher prices for everyday goods and services typically is met by higher interest rates, as lenders require additional compensation for lost purchasing power when they are repaid.  However, interest rates have been declining after peaking in March.  Part of this phenomenon can be explained by the massive amount of liquidity that the Federal Reserve is pumping into the system.  Part can be explained by investors moving out on the yield curve to earn something above flat money market yields.  Temporary inflation is likely being priced into the bond market, so higher unexpected inflation may lead to a spike in yields on the long end of the curve with the Fed increasing yields on the short end to keep the economy from overheating. That hardly seems like a risk today with 9.5 million Americans unemployed.

The second half of 2020 looks promising assuming the aforementioned risks remain contained.  While stocks here in the U.S. are at or near all-time highs, a strong economy and healthy employment levels should bode well for corporate earnings.  Europe and Asia (ex-China) are a few months behind the U.S. but continue to open and strengthen. The global economy could be on a strong trajectory for some time.  Investors should continue to remain globally invested to capture the potential resurgence abroad.

Sources: Morningstar Direct, JPMorgan, First Trust, Wall Street Journal

Clearview Portfolio Consulting May 2021 Market Recap

Key Points:

  • The S&P500 posted its fourth consecutive positive month, gaining 12.62% year to date.
  • The rotation into value stocks continued in May with energy, materials and financials leading the market higher.
  • Treasury yields have stabilized over the past few months, but inflation worries may lead to higher rates over the next year.

Investors following the old adage of “sell in May and go away” missed out on the fourth consecutive month of positive returns in the S&P500 as the broad index gained 0.7%. Year to date the index is up 12.62% which may be tempting to lock in gains. However, history has shown us that market timing is such a difficult task because getting back into the market “when things calm down” is no easy task. Things are never calm. Right now the market is grappling with high inflation expectations, a growing budget deficit, supply chain shortages, tensions in the middle east, etc. Staying invested through the pandemic last year was prudent so staying invested through the summer if you are a long-term investor probably makes sense.

Returns in May were a bit uneven as value stocks continue to lead growth stocks. The Russell 1000 Value gained 2.33% as energy (5.77%), materials (+5.22%) and financials (+4.79%) were the leading sectors. Small caps (+0.21%) underperformed large caps while international stocks performed relatively well. The MSCI EAFE Index which measures international developed markets gained 3.26% in May. With Europe emerging from the lockdowns, global economic growth expectations are high but still fragile. New coronavirus outbreaks in Asia and higher energy prices could be headwinds to the global economic recovery in the coming months.

Interest rates have stabilized here in the U.S. even as inflation seems to be trending higher. Should inflation remain high or stabilize once the economy is fully opened remains a key component on where interest rates go from here. The Barclays Bloomberg US Aggregate Bond Index gained 0.33% in May but is still down 2.29% for the year. Strong corporate earnings have allowed investment grade and high yield corporate bonds to outperform Treasuries this year by a wide margin. Municipal bonds have remained rather steady, gaining 0.3% for the month and 0.78% for the year as investors eye infrastructure stimulus coupled with higher expected tax rates that may be coming this year.

Sources: Morningstar Direct, Wall Street Journal, Charles Schwab

Clearview Portfolio Consulting April 2021 Market Recap

Key Points:

  • US GDP grew 6.4% in the first quarter following an increase in confidence.
  • Growth sectors of the market came back into favor after strong earnings reports from big tech and consumer firms.
  • Treasury yields dropped in April giving a rise to the bond market.

Gross domestic product grew at a seasonally adjusted 6.4% for the first quarter bringing the US economy within 1% of its peak, prior to the pandemic. Economic reopening in the US continues to add confidence behind inoculations, falling coronavirus case numbers and fresh stimulus dollars in consumers’ pockets. Along with the resurging US consumer, government spending on aid to businesses, vaccines and stimulus has helped fuel economic growth. According to the Bureau of Labor Statistics, the unemployment rate declined to 6% during April as businesses plan for the post pandemic recovery.

The S&P500 gained 5.34% in April, pushing its return for the year to 11.84%. Real estate (+8.28%), communication services (+7.85%) and consumer discretionary (+7.1%) were the best performing sectors following strong corporate earnings reports. While all major stock sectors were positive for the month, energy cooled of gaining just 0.59% after a strong rebound from last year. Growth stocks came back into favor with the Russell 1000 Growth up 7.69% vs. 3.95% for the Russell 1000 Value. Strong earnings reports from Apple, Google, Facebook and Amazon attracted investors back to growth, after a rotation towards traditional value names over the past 6 months.

International markets continue to lag the US with the developed MSCI EAFE Index gaining 3.01% in April and 6.59% for the year. Emerging markets +2.49% in April have been hurt by fresh coronavirus outbreaks in Latin America and India. European stocks fared well +4.54% with news of lifting restrictions and curfews in the coming months. The Eurozone economy remains sluggish and may even contract in the first quarter according to T.Rowe Price. Asian markets gained 1.03% for April and are up 3.34% for the year.

Investment grade bonds saw their first positive month of the year with the Bloomberg Barclays US Agg Bond Index up 0.79% for April. Interest rates fell for Treasury Notes and Bonds after a steep climb to start the year. Investors have been worried about inflation resulting from the strong economic recovery and massive amount of liquidity in the system. The rise in gasoline prices moved inflation higher than expected in March, but still within the Federal Reserve’s target. Limited supplies in consumer goods like bikes and cars, along with building materials, could continue to push prices higher until supply chains are back online to meet the demand. The Fed maintained its accommodative stance and will likely taper asset purchases before it raises rates to contain inflation beyond their target.

Sources: Morningstar Direct, Wall Street Journal, BLS, T. Rowe Price

Clearview Portfolio Consulting March 2021 Market Recap

Key Points:

  • Equities continued to edge higher in March with a solid 4.38% return for the S&P500 as the US economy continues to slowly open up.
  • Sectors that performed well in 2020 have underperformed so far in 2021 with technology lagging while cyclical sectors were the winners.
  • Inflation concerns pushed long dated Treasury yields higher in March.

Equities drove higher in March, ending a strong first quarter to start the year. The S&P500 gained 4.38% for the month and 6.17% for the year as the economy continues to slowly get back on track. Utilities led the way gaining 10.51% after a bruising February where rising rates hurt many dividend paying stocks. All sectors of the S&P500 were positive with Information Technology the worst performer (+1.69%) as elevated valuations and higher rates weighed on returns. Investors have shifted away from sectors that benefited most during the pandemic as the trend towards value over growth stocks continued in March with the Russell 1000 Value gaining 5.88% vs. 1.72% for the Russell 1000 Growth. This rotation typically occurs during the early stages of an economic recovery where energy (+30.85%), financials (+15.99%) and industrials (+11.41%) have led the market higher in the first three months of 2021.

Inflation concerns creeped back into the minds of investors from the Fed’s easy monetary policy, rising budget deficits and pent-up demand. Interest rates have moved significantly higher as a result, with the 10yr Treasury yield at 1.75% vs. 0.92% to star the year. However, there is slack in the economy with unemployment still north of 6%. Wage inflation, usually a requisite for price inflation, may be unlikely until we achieve a tighter labor market. The rise in mid- and long-term Treasury rates have caused bond prices to fall. The Bloomberg Barclays US Aggregate Bond Index dropped 1.25% in March and is down 3.37% for the year.

International stocks have lagged the US markets to start the year with fresh lockdowns in Europe. Rising COVID cases coupled with a sluggish vaccination distribution have given investors pause across the Eurozone. Asian markets were down in March with the MSCI China index dropping 6.28%. Chinese policymakers indicated their intent to remove stimulus measures to prevent asset bubbles.

The outlook for the remainder of the year for investments, as with any other year, will largely be determined by the state of the economy. With equities performing so well over the last 12 months the market could be vulnerable to near term setbacks. Diversified portfolios can mitigate the risks of asset bubbles in sectors and asset classes. Fortunately, the path toward herd immunity from this bruising virus only gets closer by the day.

Sources: Morningstar Direct, Wall Street Journal, Charles Schwab

Clearview Portfolio Consulting February 2021 Market Recap

Key Points:

  • Vaccine distribution is moving forward with some 66 million doses being administered. Investors praised the addition of a third vaccine from Johnson & Johnson.
  • Energy stocks led all sectors for the second consecutive month with oil prices rose above $60/barrel.
  • Long-dated Treasury yields spiked in February on inflation fears, weighing on bond returns. 

The vaccine rollout has been steadily moving forward, with the addition of a Johnson & Johnson vaccine to the mix.  According to the Center for Disease Control, as of February 24th, over 66 million total COVID-19 vaccine doses have been administered. This pushed stocks to all-time highs in February as expectations for a sustained economic recovery remain strong.  Although there were some bouts of volatility during the month, the S&P500 gained 2.76% while the small cap Russell 2000 advanced 6.23%.  Value stocks (which lagged the broader market significantly in 2020) were the strongest gainers.  The Russell 1000 Value posted a 6.04% gain while the Russell 1000 Growth lost 0.02%.  Energy (+22.66%) was the best performing sector as oil and natural gas prices rose. Financials (+11.49%) and industrials (+6.89%) were also top performers for February and among the worst hit during the selloff last year.

Treasury yields spiked in February as the yield on the 10-Year topped 1.51%.  Rates moved higher on optimism about the US economy via vaccine distribution but also on future inflation worries. Loose monetary policy and a massive fiscal package could lead to higher prices as the economy improves.  Bond investors despise inflation and require additional compensation if they anticipate lower purchasing power when they are repaid.  The Barclays US Aggregate Bond Index dropped 1.44%, marking its second worst monthly return in the past 5 years.  Treasuries (-1.81%) were hit the hardest, while corporates (-0.81%), asset-backed securities (-0.14%) and high yield +0.37% held up best. 

International markets were up in February, with the MSCI EAFE index advancing 2.24%.  Emerging markets posted a 0.76% gain with losses in Latin America (-2.99%) and China (-1.04%).  US investors with international holdings may see attractive relative returns if the global economy expands and the US Dollar continues to decline.

The US economy remains fragile but is showing signs of strength.  Unemployment is still relatively high at 6.3% according to the BLS.  The pent-up demand in travel and leisure services should help those industries as more of Americans get vaccinated and willing to travel through the spring and summer.  Investors should be mindful that this is more of a restart of the economy from a forced shutdown than a recovery from a traditional recession.

Sources: Morningstar Direct, Wall Street Journal, First Trust