U.S. Large-Caps and Bonds Gain to Kick Off the Second Half of 2021
Highlights
- The S&P 500 Index, NASDAQ Composite, and Dow Jones Industrial Average each posted new all-time highs in July. Small-caps fell for the month and growth continued its recent trend of outperformance compared to value.
- With small-caps moving lower for the month, the year-to-date leadership has shifted to large-cap companies. Value still maintains a lead over growth year to date, but that lead has narrowed. International stocks also struggled in July.
- The 10-year U.S. Treasury yield continued its recent slide lower in July. After closing June at 1.45%, it ended July at 1.24%. Most bond sectors continued their recovery in July after a rough first quarter.
- The U.S. economy is still solidly recovering, but some economic data points showed moderating growth. The initial estimate of Q2 GDP was released and it disappointed at a 6.5% annualized rate compared to expectations of 8.4%.
- The Delta variant continues to spread more widely in the U.S. and globally. It is yet to be seen whether this might have an impact on the economic reopening.
- We expect ongoing economic improvements and continued above trend growth in the second half of 2021. However, volatility could increase in the months ahead with markets near all-time highs and pandemic issues ongoing.
Equity Markets
Growth continued its recent trend of outperformance compared to value in July. However, even more dramatic was the dominance of large-cap stocks compared to small-caps for the month. While most major U.S. equity indices enjoyed solid gains in July, small-caps fell rather sharply and relinquished their year-to-date leadership role.
After hitting a 52-week intra-day low near the end of June at 14.1, the VIX Index generally trended higher in July. It spiked above 25 at one point during the month (although it did not close at that level) and by the end of July, the VIX Index stood at 18.24. Despite volatility picking up during the month, stocks were generally higher. We believe investors should be prepared for ongoing periods of volatility over the next several months with stocks near all-time highs and after such a strong first half of 2021.
Style mattered once again in July, but market capitalization was a more significant driver of returns during the month. Although there will be times when growth rallies, we still believe that the value/growth disparity that reached a peak last year will likely continue to shift in 2021 with value improving on a relative basis.
The numbers for July were as follows: The S&P 500 gained 2.38%, the Dow Jones Industrial Average advanced 1.34%, the Russell 3000 improved by 1.69%, the NASDAQ Composite rose 1.19%, and the Russell 2000 Index, a measure of small-cap stocks, declined by -3.61%. This drop in the Russell 2000 Index in July now causes it to lag the large-cap indices so far this year. Year-to-date returns in the same order were as follows: 17.99%, 15.31%, 17.06%, 14.26%, and 13.29%, respectively.
We will continue to monitor how trends shift in the coming months and whether the recent gains in large-cap growth stocks develop more footing, or whether small and mid-cap stocks, along with value, return to their recent leadership roles.
Looking closer at style, the headline Russell 1000 Index gained 2.08% in July. The Russell 1000 Growth Index drove results as it had in June, up 3.30%, while the Russell 1000 Value Index gained only 0.80%. Year-to-date returns were 16.71% and 17.98%, respectively. Value is still outperforming growth so far in 2021, but that gap narrowed with the returns from last two months. The small-cap universe was down in July regardless of style, with both growth and value declining.
International markets struggled in July, and particularly within emerging markets. Asian markets were hard hit during the month as China ramped up regulatory restrictions. The MSCI Emerging Markets Index dropped -6.73% in July, wiping out most of its gains for the year, and the MSCI ACWI ex USA Index, a broad measure of international equities, fell -1.65%. For the year to date, those two indices now show gains of 0.22% and 7.36%, respectively. Following the trend of recent years, U.S. stocks have continued to outperform their international counterparts.
Fixed Income
After surging higher during the first quarter, the yield on the 10-year U.S. Treasury has declined over the last four months. The yield closed the month of June at 1.45% and it slipped lower in July to end the month at 1.24%. Most bond sectors struggled in the first quarter, particularly the most interest-rate sensitive bonds, but they have been recovering from that point as yields have dropped.
High yield bonds have been the winner in fixed income so far this year, but Treasury Inflation-Protected Securities (TIPS) have surged of late, which has made them among the best pockets of the bond market. The ongoing and massive support from the Federal Reserve is keeping a lid on interest rates (particularly on the front end of the yield curve), but we did anticipate some steepening of the yield curve would occur in 2021. That steepening has happened, but as is typical, these moves are not just made in a steady manner. The yield curve has flattened somewhat in recent months with longer-term yields declining.
Fixed income returns for July were as follows: the Bloomberg Barclays U.S. Aggregate Bond Index gained 1.12%, the Bloomberg Barclays U.S. Credit Index advanced 1.30%, the Bloomberg Barclays U.S. Corporate High Yield Index rose 0.38% and the Bloomberg Barclays Municipal Index gained 0.83%. For the year to date, those index returns in the same order were as follows: -0.50%, 0.01%, 4.01%, and 1.90%, respectively. U.S. Treasuries enjoyed gains across the board as interest rates dropped with longer dated U.S. Treasuries showing the best results in July (the 30-year index was up +4.11% for the month), but it is still down -5.51% year to date.
As inflation concerns and expectations have increased in recent months, TIPS have had solid results. Over the last three months, the Bloomberg Barclays U.S. Treasury TIPs Index has gained 4.54%, which puts its year-to-date gain at 4.44%. We continue to maintain our long-standing position favoring credit versus pure rate exposure in this interest rate environment.
S&P 500 Index is an unmanaged group of securities considered to be representative of the stock market in general. You cannot directly invest in the index.
Dow Jones Industrial Average - The Dow Jones Industrial Average is a popular indicator of the stock market based on the average closing prices of 30 active U.S. stocks representative of the overall economy.
NASDAQ Composite Index measures all NASDAQ domestic and international based common type stocks listed on The NASDAQ Stock Market. Today the NASDAQ Composite includes approximately 5,000 stocks, more than most other stock market indices. Because it is so broad-based, the Composite is one of the most widely followed and quoted major market indices.
Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index, which represents approximately 8% of the total market capitalization of the Russell 3000 Index which includes the 3,000 largest companies in the U.S., based on market capitalization. As of the latest reconstitution, the average market capitalization was approximately $762.8 million; the median market capitalization was approximately $613.5 million. The largest company in the index had an approximate market capitalization of $2.0 billion and a smallest of 218.4 million.
Russell 1000® Growth Index measures the performance of those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values.
Russell 1000® Value Index measures the performance of those Russell 1000 companies with lower price-to-book ratios and lower forecasted growth values.
Government bonds are guaranteed by the U. S. Government and, if held to maturity, offer a fixed rate of return and fixed principal value.
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