Top Weekly Themes
- Volatility – Whether a function of concerns about the Delta variant of the COVID-19 virus, possible peak earnings growth, seasonality, or other factors, volatility has certainly picked up within the equity markets. The S&P 500 Index hit an all-time closing high earlier this month (Monday, July 12), when it had generated a year-to-date return of 17.6%. It drifted lower by 1.3% over the balance of that week before tumbling 1.6% last Monday. The market then bounced back sharply over the next three days to recoup essentially all of those declines. As of last Thursday’s close, the Index was only 0.4% below its all-time closing high. Many feared the big sell-off day could well be the start of a correction. As chronicled in our narrative from June 7, over the past 70 years, corrections (declines of at least 10%) have happened on average about every 17 months. The last such correction took place in March 2020. While we do not know if this pick-up in volatility will lead to further downside in the near-term, we are confident that, if it does, the worst that lies ahead would be a normal correction — not the start of something more sinister within equity markets.
- Yields tumble in flight to safety – Yields on 10-Year Treasuries, that started the year at 0.93%, before vaulting to 1.74% to close out the first quarter, continued their recent trend lower. The pace of the decline picked up last week, as Treasuries benefited from a flight to safety during Monday’s sell-off within the equity markets. The yield on the benchmark bond fell to 1.17%, its lowest level since February 12. Our feeling is that yields were a bit ahead of themselves at the end of the first quarter, and we envisioned a pullback before resuming higher. That said, while we have been a bit surprised by the degree of the rally in Treasury prices (decline in yields), we still feel that the trend in rates between now and year-end will be higher and not a continuation of recent market action.
- Bipartisanship, on second thought, maybe not – During the election, President Biden stressed his track record, as a former Senator, in being able to reach across the aisle and work with the opposition. To date, however, the meaningful legislation that has come forth from the Biden Administration has been passed with no Republican support. That looked like it might change when a bipartisan infrastructure bill was put forth and then endorsed by the White House. However, this proposed legislation has now hit a bump in the road. Republicans are pushing back against one of the funding sources for the spending, specifically increasing resources for the IRS, that presumably would result in higher tax collections (added revenue). The minority party is now against this source of funding, indicating that Democrats are already planning to increase IRS funding later this year in separate legislation. Little has been done in Washington in a truly bipartisan manner of late, and that may well continue to be the case going forward. Regardless, whether it is done with Republican support or not, we do believe a substantial increase in infrastructure spending will be forthcoming over the coming months.
|Russell 1000 Value||(0.6)||18.8||35.6||10.83||11.72||1.87|
|Russell 1000 Growth||(0.8)||20.4||34.1||24.38||24.36||0.66|
|MSCI EM (Emerging Markets)||(1.8)||1.6||18.5||10.65||10.56||2.07*|
|Fixed Income||Week||YTD||1-Year||3-Year||5-Year||Div Yield|
|Bloomberg Barclays US Aggregate||0.4||(0.4)||0.0||5.72||3.29||1.42|
|Bloomberg Barclays US High Yield – Corporate||0.3||5.0||10.9||7.17||6.86||3.75|
|Bloomberg Barclays Municipal Bond||0.1||1.6||3.4||5.26||3.45||0.96|
|Bloomberg Barclays Global Aggregate x US (Country)||0.4||(3.1)||1.0||4.10||2.10||0.85|
|Crude Oil WTI (NYM $/bbl) Continuous||4.8||49.6||89.7||1.7||10.6||72.6|
|Natural Gas (NYM $/mmbtu) Continuous||11.1||116.2||131.2||25.4||13.3||5.5|
|Gold NYMEX Near Term ($/ozt)||0.1||(5.3)||(8.4)||14.5||6.4||1,792.4|
|Copper Cash Official LME ($/mt)||2.5||22.6||39.3||16.9||15.0||9,488.5|
|Currencies||1 Week Ago||YTD||1-Year Ago||3-Years Ago||5-Years Ago||Current Level|
|U.S. Dollar per Euro||1.18||1.22||1.19||1.17||1.12||1.18|
|Japanese Yen per U.S. Dollar||110.34||103.25||105.48||112.10||102.40||109.30|
|U.S. Dollar per British Pounds||1.37||1.37||1.29||1.31||1.32||1.38|
Chart of the Week: Average Stock Lagging the Index
Prior to the recent sell-off, were an investor to have simply focused on the returns of certain large-cap indices, the investment picture would have looked very favorable.
Thanks to the recent strong runs in certain large-cap tech stocks, which have bigger weights within cap-weighted indices, the S&P 500 Index, the NASDAQ, and the Russell 1000 Index each clocked in with all-time closing highs during the past two weeks.
However, looking at how the average stock has performed over the last three months shows a much different picture. The data in the chart above was compiled prior to last Monday’s sell off and shows the average stock constituent’s decline from its last three-month high.
Every sector is in the red using this methodology, with the overall average lower by 9.8%. This at a time when the trailing three-month return for the cap-weighted Russell 1000 Index actually showed a positive return of just over 3%.
The clear takeaway is that while the Indices posted new all-time highs just two weeks ago, many stocks have, under the surface, already experienced a correction (defined as a 10% pull back).
Commentary: Case in Point, Small-Cap Stocks
Looking at the Russell 2000 Index of small-cap stocks, after a sharp advance to start the year, these shares have been significant underperformers over the past few months.
To wit, from its closing high on March 15, 2021, through last Monday’s close, the Russell 2000 Index of small-cap stocks has slumped by -9.4%, vs. a 7.8% advance for the S&P 500 over the same time period.
As the bottom chart displays, the percent of stocks within this Index that are above their 50-day moving average was recently nearing territory that has, in the past, been a favorable signal for forward returns. With our strategies overweight smaller cap domestic equities, we believe a large amount of corrective action has already occurred within this area of the market and that it is once again poised for a repeat of the first quarter of 2021, specifically outperformance relative to large-caps.