Authored by :
Michael G. Dow, CAIA, CFA, CPA, Chief Investment Officer
Julien R. Frazzo, Director of Risk Management and Securities Research
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The Quick Facts
- Stocks once again hit record highs during the month of July despite a resurgence of COVID-19 cases
- 10-Year Treasury yields continued to fall, helping growth stocks
- Emerging market stocks erase 2021’s gains as China slumps
- Large Cap Growth stocks outperformed over the month of July
- The clock has started on a Quantitative Easing (QE) taper
U.S. equity benchmarks closed higher for a sixth consecutive month, the longest such stretch since 2018, as investors digested a dovish Fed, a continued rise in Delta variant Coronavirus cases and another strong set of earnings. The S&P 500 2021 EPS number is now estimated to be greater than $200 a share. This is up more than $9 from July 1st and more than $30 from January 1st.
After a stumble in January, the S&P 500 has strung together six consecutive months of gains and started the second half of 2021 with a total return of 2.4% in July, bringing the year-to-date (YTD) total return to an impressive 18%. Smaller caps have underperformed in July, with the Russell 2000 retracting by 3.6% (+13.3% YTD). The Russell 1000 Growth Index (+16.7% YTD) has outperformed the Russell 1000 Value Index (18% YTD) by 2.5% in July, as the recent rotation back towards Growth over Value continues.
Health Care (+4.9%, +17.6% YTD), Real Estate (+4.6%, +28.9% YTD) and Utilities (+4.3%, +6.8% YTD) were the top-performing sectors in July. All three sectors benefited from the flattening of the yield curve that make their yields relatively more attractive. Financials cooled off to start the quarter, closing the month down 0.5%, while Energy stocks were slammed mid-month as COVID-19 fears resurfaced, finishing lower by 8.3%. Energy stocks did begin to recover to close out July and remain the market leaders on a YTD basis, gaining over 33%.
July Asset Class Performance
China’s stock selloff has caused emerging market equities to erase all their gains for the year. The MSCI Emerging Markets Index – which has more than a third of its weighting in China – wiped out what was left of its 2021 advance after sliding 6.7% in July. The crackdown in China is adding to concerns as investors assess how far Beijing officials will go as they seek to reshape the world’s second-largest economy. On the earnings front, nearly 60% of S&P 500 companies reported earnings during the month, with a record 88% beating earnings expectations and 84% also reporting a beat at the top-line. These figures top the five-year average of 75% and 7.8%, respectively.
Outside of earnings, the big event this month was the FOMC policy meeting which unlike last month’s meeting was very much in line with expectations. In a unanimous vote, the FOMC held interest rates near zero. However, the Fed noted that the economy has made progress toward its goals. For now, the Fed will keep buying $80 billion of Treasuries and $40 billion of mortgage-backed securities (MBS) each month but the clock has started on a QE taper. Bottlenecks have been larger than anticipated but inflation is still viewed by the Fed (and the market) as transitory. Yields on 10-year U.S. Treasuries have settled into a new lower range around 1.25% (1.22% on July 31st and down another 6bps to 1.16% on August 2nd), following the Fed messaging and rising market sentiment that the Fed will successfully suppress long-term inflation pressures in the economy before it gets out of control.
WTI crude closed 1.6% higher in July at $74/bbl (+53.5% YTD), posting a fourth monthly gain. Gold’s +2.5% move to $1,814/Oz in July was helped by the Fed’s dovishness. Lower interest rates reduce the opportunity cost of holding non-yielding bullion. After trading mostly sideways so far this summer, Bitcoin rallied by 20% in July to $41,540, with some investors attributing the rally to short positions being liquidated and speculation that Amazon may be venturing into digital currencies. The CBOE Volatility Index (or VIX), also known as the fear-gauge, spiked mid-month to above 20%, before settling at 18.2%.
Investment Summary – “Inflation, Rates, and Rotation” in an Era of Financial Repression
At Beacon Pointe, we are “risk-on” given economic reopening and vaccine developments. We cannot ignore the massive monetary and fiscal support to date, and the possibility of more to come, but have somewhat less conviction after a massive rally. We prefer Equity and Alternatives to “safe” Core Fixed Income given the current and expected negative real yield environment. We are maintaining our positions that reflect a rotation from U.S. Large Cap Growth to U.S. Large Cap Value, U.S. Small Cap, EAFE (growth) and EM equities given economic reflation. We retain the inflation protection position in TIPs. We are taking the position back to neutral in U.S. High Yield (corporate and muni) and go overweight U.S. Short Term as we expect interest rates to rise from exceedingly low levels. We add to the shift in our overall allocation to Alternatives, specifically maintaining the focus on Private Credit, Private Real Estate and Real Assets while adding an allocation to Hedge Funds.
Chart of the Month – Historically Low Real Yields
Interest rates remain at very low levels historically, and with higher inflation expectations the result is negative real yields, the hallmark of a concerted government effort to pursue financial repression. Rates rose quickly in 1Q21 in response to positive vaccine developments and economic reopening. Since then, rates have fallen as the Fed reiterated its unwillingness to allow inflation expectations to become “unanchored” at the June FOMC meeting and managed to convince the market that inflation is transitory.
Major Asset Class Dashboard
Important Disclosure: This report is for informational purposes only. Opinions expressed herein are subject to change without notice. Beacon Pointe has exercised all reasonable professional care in preparing this information. The information has been obtained from sources we believe to be reliable; however, Beacon Pointe has not independently verified, or attested to, the accuracy or authenticity of the information. Nothing contained herein should be construed or relied upon as investment, legal or tax advice. All investments involve risks, including the loss of principal. Investors should consult with thier financial professional before making any investment decisions. Past performance is not a guarantee of future results.
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