Key Points:

• 2021 was a strong year for risk assets as the S&P500 gained almost 29%.
• Higher than expected inflation has pushed to Fed to taper its asset purchases and will likely cause interest rate hikes in 2022.
• International stocks continue to lag the US markets, but long-term investors have benefited over time from global diversification.

2021 marked a solid year for risk assets as the global economy recovered from the shutdowns of 2020. Despite new coronavirus strains during the summer and fall, US stocks pushed to new all-time highs during the year. The S&P500 closed 2021 up 28.71%, it’s third largest calendar year gain since the turn of the century. Low interest rates coupled with strong economic growth fueled not only equity prices higher, but prices for goods and services for consumers.  Inflation, which had been rather subdued over the past decade, came in at readings not seen since the early 1990s. The Federal Reserve has responded by beginning to taper their asset purchases of Treasuries and mortgage-backed securities, which were meant to provide liquidity during the crisis.  In addition, the Fed will likely begin raising interest rates in 2022 to keep inflation under control. Against this backdrop, many economists and market participants expect economic growth to moderate in 2022, which may cause equities to have a more muted year.

International stocks lagged the U.S. for the fourth consecutive year.  In efforts to combat coronavirus outbreaks, lockdowns in Europe and Asia slowed economic activity during the year.  The MSCI EAFE Index, which is a measure of international developed countries, managed to gain 11.26% in 2021.  Emerging market stocks dropped 2.54% with losses in Chinese, Latin American and Korean equities.  Economic disruptions across the globe caused supply chain bottlenecks, further exacerbating global inflation.  While international investments have struggled against their US counterparts over the past few years, their attractive valuations and long-term diversification benefits should not be ignored.

Bonds were a challenging asset class as Treasury yields climbed during the year.  The Bloomberg US Aggregate Bond index lost 1.54% in 2021, its second worst annual return since 2000.  Inflation protected securities (+5.96%) and high yield (+5.00%) were the best performing sectors following strong economic growth and higher inflation, while intermediate Treasuries lost 2.87%.  If the US economy continues to grow and inflation remains elevated in 2022, yields will likely climb.  While that may not create positive returns for bonds this coming year (bond prices fall when yields rise), it is important to remember the role of bonds in a diversified portfolio.  Looking back to 1990, the Bloomberg US Aggregate Bond Index was positive in every calendar year that the S&P500 was negative. It is also important to remember that as interest rates climb, so do yields.  Bonds maturing may be re-invested at higher yields so there will likely be some short-term pain to achieve a longer-term gain (higher yields).

Sources: Morningstar Direct, Wall Street Journal, Nuveen, Capital Group

Key Points:

• Markets became very volatile to close out November on news of a new coronavirus variant
• Stocks across the globe dropped as inflation, Fed tapering and potential lockdowns weighed on investor sentiment
• Risk assets will likely remain volatile for the rest of 2021 and into the new year.

The new Omicron variant of the coronavirus has caused a lot of anxiety among investors as we head into the home stretch of 2021. This new variant’s transmissibility and mortality rates are still unknown, but that hasn’t stopped nations across the globe from enacting travel restrictions and limiting activities. Fear that new lockdowns could cause the global economic recovery to stall turned investors away from risk assets in November and early parts of December. The S&P500 dipped 0.69% in November with financials (-5.68%), communications stocks (-5.16%) and energy (-5.09%) performing worst. Technology was the only bright side of the market gaining 4.35% as investors migrated towards semiconductor chip, software, and hardware stocks. Small caps were hit rather hard with the Russell 2000 losing 4.17%. In addition to the virus uncertainty, inflation has remained stubbornly high, causing the newly re-elected Fed Chairman Jerome Powell to suggest the tapering of asset purchases by the central bank could be accelerated.

International stocks sold off in November as a flight to safety in Treasuries caused the US dollar to rise. Despite much lower relative valuations compared to the US stock market, international stocks looked poised to trail the US market for 2021. Stocks outside of the US have struggled this year with the slowdown in the Chinese economy having rippling effects across Asia and Europe.

High quality bonds held up well during the month with TIPS (+0.89%), municipals (+0.85%) and intermediate Treasuries (+0.77%) providing a ballast for balanced investors. The riskier sectors of the bond market fell along with the stock market as high yield bonds lost 0.95%. Treasury yields fell dramatically in the last week of November as demand for high quality assets drove prices up (bond prices and yields move in opposite directions).

As we move into the new year, markets will likely remain volatile as inflation, omicron, interest rates and rich valuations remain headwinds to risk assets. Markets can be choppy over the near term as investors separate the news from the noise. However, over the long-term, stocks tend to follow their earnings and free cash flow but riding out the bumpy times is never an easy task.

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

Key Points:

• Equity markets rebounded sharply to all-time highs in October after a selloff in September
• The Federal Reserve will likely be tapering their asset purchases in November or December.
• International stocks have lagged the US all year but could draw more demand based on cheaper valuations and higher dividend yields. 

Stock rebounded sharply in October after a steep decline in September. The S&P500 had its strongest month of the year, gaining 7.01%.  For the year, the index is up 24.04%. All the domestic sectors were in positive territory with consumer discretionary (+10.94%) and energy (+10.36%) leading the way.  Growth stocks outperformed value and small caps underperformed large caps. Strong earnings growth continues to propel stocks to all-time highs. According to BlackRock 80% of companies in the S&P500 which have reported third quarter earnings through the end of October have beaten expectations. While optimism in the stock market remains strong, supply chain disruptions remain a challenge with rising prices.

All eyes will be on the Federal Reserve meeting this week with expectations of bond purchase tapering to be announced. Short term interest rates will likely remain unchanged but less demand for longer dated bonds could push long-term yields higher. Fed Chairman Jerome Powell’s position is in question at a critical time as the Fed unwinds its massive fiscal stimulus in the face of higher inflation. Interest rates seem to be range bound with the 10-year Treasury yield ending October at 1.56%. It seems like higher yields are a foregone conclusion but yields across the globe remain low. Government bonds in Japan pay just a few basis points while Germany still has negative yields. The UK may be the first central bank to raise interest rates to combat rising inflation according to the Wall Street Journal.

International stocks continue to lag the US with the MSCI EAFE gaining 2.46% in October and 11.01% for the year. Cheaper stock valuations abroad may begin to draw more interest. JPMorgan’s Guide to the Markets shows that international stocks (MSCI ACWI) trade at just 14.5x forward earnings vs. 21.2x for the S&P500. Higher relative dividend yields outside the US could also attract more investment as investors deal with potentially higher bond yields and corresponding lower prices.

Sources: Morningstar Direct, Wall Street Journal, BlackRock

Key Points:

• September was a challenging month for US stocks as the S&P500 experienced its worst loss of 2021.
• Political uncertainties in the US are causing anxiety among investors over taxes, the debt ceiling, and a $3.5T spending plan.
• A default in China’s biggest property development companies spooked global fixed income investors and a flight to safety. 

Markets were a bit rocky in September as concerns over inflation, disfunction in Washington, lower economic growth expectations, and increasing interest rates weighed on risk appetite.  The S&P500 suffered its worst month of 2021, losing 4.65% in September.  Energy stocks were the only positive sector, gaining 9.44% following steep increases in oil and natural gas prices. Supply chain issues from the lockdowns are still lingering across the globe and weighing heavily on production.  Tight inventories in everything from automobile computer chips to natural gas in Europe to coal in Chinese electricity production are causing high prices and limited availability for many consumer goods.

A host of uncertainty in Washington is causing anxiety for investors: the debt ceiling struggle, a huge infrastructure bill, potential tax increases, Fed tapering, and the future level of interest rates if inflation remains high.  Currently, the Federal Reserve is buying $120 billion a month of Treasuries and mortgage-backed securities to provide liquidity caused by the Covid pandemic.  They will gradually be “tapering” these purchases in the coming months as that level of stimulus is not longer required. This may cause yield to move higher as economic growth and inflation expectations remain high.  As interest rates rose in September, bond prices fell with the Barclays US Aggregate Bond Index posting a -0.87% return.

International stocks held up better than the US with the MSCI EAFE Index losing 2.9%.  Evergrande, one of the largest property developers in China, missed debt payments and caused global concern over its potential ripple effect across fixed income markets.  Chinese stocks dropped 5.02% during the month and are down 16.67% for the year.  Latin American stocks were also hit hard dropping 10.34% as higher inflation and the stronger US dollar weighed on their local currencies.  Russia (+6.34%) and Japan (+2.75%) were among the strongest equity markets for the month.

The remaining months of this year could continue to be volatile, but an improving labor force and strong corporate earnings could alleviate some of those fears.  Investors should continue to remain diversified and focus on long-term fundamentals in time of short-term uncertainty.

Sources: Morningstar Direct, Wall Street Journal, Guggenheim, BlackRock

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

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

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

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

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

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