Authored by :
Michael G. Dow, CAIA, CFA, CPA, Chief Investment Officer
Julien R. Frazzo, Director of Risk Management and Securities Research
* * *
The Quick Facts
- The S&P 500 more than doubled from its pandemic closing low
- The U.S. equity benchmarks closed higher for a seventh consecutive month, the longest winning streak since January 2018
- Fed chair Jerome Powell signaled no rush to tighten monetary policy, speaking from the Jackson Hole symposium
- Growth outperformed Value as inflation concerns abated
- 10-year Treasury yields increased 9bps to close at 1.31%
The S&P 500 equity benchmark has rallied 100% from its Covid-19 pandemic trough of 2,237.40 on March 23, 2020, on a closing basis. It took just 354 trading days to get there, marking the fastest bull-market doubling off a bottom since World War II. How much of the rally from the pandemic lows is about the economic recovery or about the monetary and fiscal interventions, is up for debate. Nonetheless, it has been an extraordinary rally. The Federal Reserve has succeeded in re-liquifying the economy with massive quantitative easing, while also raising the risk of speculative activity.
The Delta variant, inflation concerns, supply chain constraints and labor shortages were not enough to deter the bull market momentum. After a -1% stumble in January, the S&P 500 has strung together seven consecutive months of gains with a total return of 3.0% in August, bringing the year-to-date (YTD) total return to 21.6%. The tech-heavy Nasdaq climbed about 4.1% in August, lifting its YTD return to 18.9%. Since the beginning of the year, Value had been outperforming Growth, but this trend reversed in August as the “reopening” trade that favored Value and cyclical names took a hit, with the Delta variant derailing the smooth reopening of many businesses. The Russell 1000 Growth is now up 21.1% YTD, ahead of the Russell 1000 Value, up 20.3% YTD.
Financials (+5.1%, +31.4% YTD), Utilities (+3.9%, +11.0% YTD) and Communication Services (+3.9%, +27.3% YTD) were the top performing sectors in August. Energy was the only sector down for the month (-2%) and quarter (-10.2%) but remained one of the best performing sectors YTD, with a +30.3% total return.
August Asset Class Performance
Q2 2021 corporate profits surged, helping stocks move higher. The 87% of companies that beat on both earnings and sales consensus estimates for Q2 were both records, and well above the 75% five-year average for EPS and 65% average for sales. The average EPS upside beat for S&P 500 companies was 16.4% for the quarter, while sales estimates were higher by 4.9%. Q2 2021 marked the highest revenue surprise percentage since FactSet began tracking this metric in 2008.
Speaking from the symposium at Jackson Hole last week, Fed Chair Jerome Powell signaled no rush to tighten monetary policy. Powell didn’t provide a specific timeline for scaling back the Fed’s $120 billion-a-month in bond buying. The Fed Chair said the central bank could begin reducing its monthly bond purchases this year, though it would not be in a hurry to begin raising interest rates thereafter.
The yield on the benchmark 10-year Treasury increased in August from a low of 1.17% to close the month at 1.31%. 10-year yields have steadily declined from the March highs of 1.74%, supporting equities as inflation concerns abated but have more than doubled from their August 2020 low of 0.51%. 10-year Treasury yields remain historically very low when looking at 230 years of interest rate data.
The MSCI Emerging Markets Index – which has more than a third of its weighting in China – posted a 2.6% gain in August 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. The MSCI EAFE (Europe, Australasia and the Far East) and MSCI EM (Emerging Market) indices are significantly underperforming U.S. equity benchmarks with a 12.0% and 2.8% total return YTD, respectively, vs. 21.6% for the S&P 500.
WTI crude oil fell to the lowest since May before facing energy supply disruptions resulting from Hurricane Ida. WTI saw a monthly decline of 6.5%, the biggest loss since October 2020. Gold slumped below $1,700/Oz to a more than 4-month low, after strong U.S. jobs data increased expectations of the Fed raising rates sooner than anticipated. Gold quickly wiped out the intra-month loss after a plunge in the U.S. consumer sentiment to a six-month low on Delta variant. Gold finished flat for the month at $1847/oz. Following July’s gains, Bitcoin continued to move higher to close out August up 13.1% at $47,009.
The CBOE Volatility Index (or VIX), also known as the fear-gauge, spiked mid-August to 24.7 but settled to 16.5 at the end of August, in line with pre-pandemic levels.
Investment Summary – “Inflation, Rates, and Rotation” in an Era of Financial Repression
At Beacon Pointe, we remain “risk-on” given the expansion mode in global activity and pandemic developments. While we are reaching peak policy stimulus, we cannot ignore the massive monetary and fiscal support to date, and the possibility of more to come, but have somewhat less conviction after an impressive re-pricing of most asset classes’ risks/rewards. We prefer Equity and Alternatives to “safe” Core Fixed Income given the current and expected negative real yield environment. Equity risk premia remain within historical range, neither rich nor cheap at 3.3%, the 20-year average. We maintain our positioning that reflects 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 now neutral U.S. High Yield (corporate and muni) and overweight U.S. Short Term, as we expect interest rates to rise from exceedingly low levels. We added 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 – U.S. Dollar Reserve Currency Status
The dollar has functioned as the world’s dominant reserve currency since World War II. Today, central banks hold about 60% of their foreign exchange reserves in dollars. No other currency comes close. Historically, shifts from one dominant international currency to another occur over many decades. Observers have speculated whether changes in the global economy and geopolitics, could cause a shift from the dollar to other currencies. Focus is centered on China’s economic rise and digital currencies. To date, there is no evidence of a shift away from the U.S. dollar as the dominant reserve currency
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.
© Beacon Pointe Advisors. All Rights Reserved.