US Stocks
The old is new again as investors turned their focus back to the big technology stocks such as Apple, Microsoft, Google, Facebook, and Amazon. Strength in these mega-cap companies helped lift the S&P 500 to an all-time high in June. It was a fifth consecutive monthly advance for the US stock market, capping a strong first half.
Microsoft made headlines late last month as it crossed the vaunted two trillion dollar market cap figure—only Apple had surpassed $2T before “Mr. Softy’s” (as traders dub MSFT) climb. Some of the big winners early in the year within the Energy, Financials, and Materials sectors suffered declines last month.
In all, the S&P 500 gained 2% while the Dow Jones Industrial Average fell less than 1%. The tech-heavy Nasdaq Composite tacked on a solid 5.5% while small companies, as measured by the Russell 2000, rose 2%.
June US Stock Market Performances
An interesting feature of the last month and a half in the equity markets is the notable shift back to the “stay-at-home” plays that worked in 2020 when we are all hunkered down afraid of the end of the world. With vaccines being doled out by the millions across the USA, why are shares of firms such as Zoom and Peloton back on the rise? Perhaps the Delta Variant is giving investors reasons to worry as we head into the second half of 2021.
Restrictions are in place across parts of Europe and the Far East as new COVID cases are dominated by the Delta Variant.[i] There are even traveling restrictions in these areas despite Americans’ quest for summer travel. It goes to show that while the situation in the States is rather optimistic, there are still hurdles to climb.
Back to the markets, a good gauge of investor sentiment regarding the “stay-at-home” trade versus the “re-opening” trade is to compare the JETS global airline fund to the IBUY online shopping ETF. When this chart is going down, it means investors are buying online retail stocks and selling travel stocks. IBUY has been doing very well since mid-May while JETS is suffering (as we saw during March-April 2020).
US Global Jets ETF (JETS) Versus Amplify Online Retail ETF (IBUY): JETS Lagging Since Mid-May
International Stocks
As US stocks generally posted gains, international equities underperformed to finish near the unchanged mark for both large and small ex-US indices. A relative overseas bright spot was the Emerging Markets index which garnered a 1.2% advance.
Foreign Equities June Performance
What’s interesting about Emerging Market stocks is that the index is kind of like the US market these days—it features a few big technology and consumer companies. One firm, Taiwan Semiconductor, is at the center of the madness that is the chip shortage hampering the global supply chain. With most new cars needing these now more expensive chips, we have seen vehicle prices go to the moon this year.[ii] Just last week, Ford announced it will idle or curb output at more plants because of the semiconductor chip shortage.[iii]
Understandably, foreign equities have hit the breaks given the Delta Variant outbreak in Europe and parts of Australasia.[iv] Nevertheless, US stocks and non-US stocks have taken turns outperforming over the last 18 months, so the price-action is nothing new. It’s a sign that diversification works.
Fixed Income
Bond buyers were back in the saddle again as the US 10-year Treasury rate dipped below 1.4% for a short time last month. Bond yields fall when prices rise. It closed the first half at 1.47%, still well below the 1.749% mark at the end of Q1. Inflation fears are easing despite the US Federal Reserve calling for the potential for interest rate hikes as early as late next year.
Traders can look to what’s called the “breakeven” spreads on Treasuries to get a gauge on expected inflation over the coming five and ten years. Annual inflation for the next five years is expected to be about 2.45% while the 10-year outlook is slightly more subdued at 2.34% according to the chart below.
Inflation Expectations: 10-Year and 5-Year Breakevens
Bond Market Optimism
Another gauge of investor sentiment is what is happening with the yield on high-quality and junk bonds. The Wall Street folks in suits and ties call them “investment grade” and “high yield” debt, respectively.
The pair of fixed income products feature interest rates at all-time lows compared to risk-free Treasury bonds. That has some market pundits antsy that investors are too optimistic about the economy. We tend to see these “spreads” narrow in good times, and then expand in bad times. These must be high times! The current yield in high-quality debt is 2.06% while junk bonds offer a rate of 3.99%.[v][vi]
Economy
We’ll spare you the run-down on commodities and crypto this month. In short, commodities have taken a breather (sans oil and gasoline prices!) while the crypto space witnessed a dramatic fall from grace as Bitcoin dropped from $65,000 to near $35,000. Dogecoin: no comment.
Getting back to the serious matters…is the economy too hot to handle right now? The US Federal Reserve increased their 2021 GDP outlook to 7% growth (after inflation) which would be the best since the mid-1980s. A global outfit called the OECD upped its worldwide GDP forecast to 5.8% for the year—that would be the best since the 1973.[vii] What’s not to love??
Supply chain shortages, order backlogs, and rising central bank interest rates to name a few problem spots. Domestically, demand is uncoiling with huge numbers of Independence Day travelers, a red hot housing market, and surging retail spending.
Remarkably, we as US savers still have a big pot of money sitting in our collective checking accounts according to the economic data and the latest Saving Rate data. This has been a recovery unlike any we have seen. With all this happening, US job openings are high and the rate of people quitting their job is at the highest level in 20+ years.[viii]
How will the second half play out? Of course, we don’t know. But here’s Wall Street’s dirty little secret—they don’t know either!!
There is always uncertainty. It’s the job of the financial media to scare us to death so our eyeballs stayed glued to the screen, but it’s our job to take all headlines with a grain of salt. Keep the perspective of a long-term investor—that’s the key to winning the investing game.
The Point
The first half of 2021 featured numerous record highs in the US stock market while gains were seen overseas as well. The bond market has not moved much in recent months and interest rates are still very low. Cash-rich Americans and cheap borrowing rates continue to fuel one of the biggest housing market booms ever seen (Michigan house prices are +13% in the last year).[ix]
Meanwhile, prices you and I see at the grocery store and the corner gas station are on the rise with high inflation over the last 12 months. These are market facts we would not have expected if we stepped back in time a year ago!
It’s a good time for a mid-year checkup on your situation. Have your goals changed? Do you have more flexibility with your finances? Perhaps you are a small business owner and still need to review your taxes—takin’ care of your business is our business!
We’ll talk soon!
DPD
[i] https://www.washingtonpost.com/world/2021/06/28/coronavirus-latest-updates/
[ii] https://www.wsj.com/articles/car-dealers-are-selling-more-vehicles-above-the-sticker-price-11624959180
[iii] https://www.wsj.com/articles/ford-to-close-or-curb-output-at-some-plants-because-of-chip-shortage-11625068975?mod=hp_lista_pos2
[iv] https://www.wsj.com/articles/delta-variants-spread-outpaces-australias-covid-19-contact-tracers-11625045400?mod=hp_featst_pos3
[v] https://fred.stlouisfed.org/series/BAMLC0A0CMEY
[vi] https://fred.stlouisfed.org/series/BAMLH0A0HYM2EY
[vii] https://www.oecd.org/newsroom/oecd-sees-brighter-economic-prospects-but-an-uneven-recovery.htm
[viii] https://www.wsj.com/articles/forget-going-back-to-the-officepeople-are-just-quitting-instead-11623576602
[ix] https://www.zillow.com/mi/home-values/