Top Weekly Themes
- The Fed keeps rates in check but is less dovish – Members of the Federal Open Market Committee (“FOMC”) concluded their most recent meeting last Wednesday. As expected, the Federal Reserve (Fed) made no alterations to existing monetary policy – no change in the Fed Funds rate or the $120 billion of monthly Treasury and mortgage-backed security purchases. Essentially, any dialing back of purchases isn’t likely to occur until year-end at the earliest based on Fed Chairman Powell’s roadmap. The Fed did elect to slightly increase the rate it pays banks on excess reserves and the reverse repo facility. This was done to better support the effective Fed Funds rate within the 0.00% – 0.25% range. Lastly, the Fed raised its 2021 projections for GDP (7.0% from 6.5%) and PCE inflation (3.4% from 2.4%). What caught investors’ attention was the upward dot plot (individual policymaker short-term interest rate forecasts) shift, with the Fed Funds rate rising from roughly 0.00% to 0.50% by the end of 2023. Also worth noting, 7 out of 18 FOMC participants projected at least one rate hike as early as 2022. Interest rates across the curve rose following this announcement, but 10-Year Treasury bonds have since fallen and are at levels modestly above the lows from the previous week. This news did not alter our fixed income market outlook. We continue to believe that interest rates will likely trend higher over the back half of 2021.
- Regulators dial up the heat on tech companies – Large-cap Technology and Communication Services stocks have been the clear market leaders since the depths of the 2008/2009 Financial Crisis. In recent years, government officials have raised concerns about the monopolistic nature of some of the most dominant players in the digital economy. However, investors were rewarded for downplaying these concerns as large-cap tech continued to outpace the market. On Friday, June 11, the Judiciary Committee proposed five new legislative bills that could constrain business operations, or in some cases, result in the divestiture of assets or “breakup” of companies such as Facebook, Apple, Amazon, and Google. This news was shrugged off by the market given that it’s unlikely the newly proposed legislation will garner enough support from both sides of the political aisle. However, we cannot rule out that an anti-trust coalition could form in the future. This tail risk, combined with the fact that many stocks in the crosshairs of such legislation are trading at high valuation levels, leaves us feeling comfortable being underweight large-cap tech.
- Equities drift higher but momentum is starting to weaken – Last Monday, the S&P 500 Index hit an all-time high, which marks the 29th time this year the equity market breached its highwater mark. Market technicals are still favorable with more than 60% of companies sitting above their 50-day moving average price level. However, this figure was north of 90% roughly two months ago. Further deterioration of market breadth could increase the odds of a market pullback as we enter the seasonally weaker period (July-September). We have not seen a material shift in market leadership towards more defensive sectors (Consumer Staples, Utilities, Health Care), which would be a more ominous sign in terms of the potential for a more significant market correction. The recent drop in rates has hurt more cyclical sectors while boosting growth stocks. Assuming we have not reached peak interest rates this cycle, we still think there is still more upside for value-oriented stocks.
|Russell 1000 Value||(0.4)||16.6||36.0||11.52||11.08||1.85|
|Russell 1000 Growth||1.2||16.6||37.8||24.72||23.38||0.67|
|MSCI EM (Emerging Markets)||(1.6)||4.1||25.7||10.26||11.69||1.85*|
|Fixed Income||Week||YTD||1-Year||3-Year||5-Year||Div Yield|
|Bloomberg Barclays US Aggregate||0.2||(0.6)||(0.5)||5.64||3.20||1.39|
|Bloomberg Barclays US High Yield – Corporate||(0.0)||3.9||11.6||7.32||6.89||3.89|
|Bloomberg Barclays Municipal Bond||0.1||1.9||3.7||5.23||3.45||0.88|
|Bloomberg Barclays Global Aggregate x US (Country)||0.2||(3.3)||2.6||3.79||2.40||0.81|
|Crude Oil WTI (NYM $/bbl) Continuous||0.4||48.2||71.6||1.8||10.2||71.9|
|Natural Gas (NYM $/mmbtu) Continuous||10.8||58.5||138.1||13.2||7.6||4.0|
|Gold NYMEX Near Term ($/ozt)||(1.3)||(4.7)||(3.2)||13.7||6.4||1,805.0|
|Copper Cash Official LME ($/mt)||0.4||21.2||43.7||15.6||13.6||9,382.5|
|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||1.16||1.17||1.10||1.18|
|Japanese Yen per U.S. Dollar||110.04||103.25||107.19||111.84||106.27||110.14|
|U.S. Dollar per British Pounds||1.39||1.37||1.27||1.31||1.31||1.38|
Chart of the Week: Stock Buybacks Accelerate and Shareholder Yield Still Favorable Relative to Bonds
S&P 500 Corporate Buybacks: 1/2012 – 3/2021
S&P 500 Index Shareholder Yield: 1/1/1998 – 3/31/21
- The first chart illustrates the quarterly amount of share buybacks conducted by companies comprising the S&P 500 Index over the last several years. The COVID-19 pandemic caused corporations to hoard cash and curtail share repurchases.
- Since the depths of the pandemic, companies have been deploying more cash to reduce share counts. We think it’s likely that the number of stock buybacks will accelerate as more large banks get the green light after the Fed releases the most current stress test results later this month. The steady increase in share buybacks over the past several years has arguably been one of many catalysts that have propelled stocks higher. We do not envision this trend changing anytime soon.
- The second chart shows the shareholder yield (stock buybacks + dividend yield) for the S&P 500 Index in comparison to 10-Year Treasury rates over the past 20+ years. Even though share buybacks have fallen from peak levels, and the dividend yield for equities has declined, shareholder yield is still compelling relative to interest rates obtained from fixed income securities. Rising interest rates do pose a risk to the “TINA” (There is no Alternative) to stocks notion. However, rates would have to climb by a substantial margin to close the valuation gap between stocks and bonds.
Commentary: Active Managers Have Fared Well Thus Far in 2021
The chart referenced above illustrates how poorly Large-Cap Core active strategies have performed in comparison to the S&P over the prior decade. Active managers often place some emphasis on equity valuations and tend to favor lower weighted-average market caps in relation to broad market indices. The strong performance of mega-cap tech (“FAANG”) has posed a major headwind for the typical strategy benchmarked against the S&P 500 Index.
During the first five months of 2021, there has been a material improvement in the relative results delivered by active managers, at least within the Large-Cap Core space. The reopening trade, which has been particularly beneficial to more cyclical stocks (value, small-cap, etc.) has coincided with improved investment results delivered by active strategies.
One may question the efficacy of active management, especially given the higher fees and prior results over the past decade. So why not just track the benchmark and avoid trying to outperform it? We get this question quite frequently. BMT has continued to advocate that investors would be best served by owning a mix of active and passive investments. The reason is because of the inherent cyclicality of active/passive performance cycles. For the first ten years of this century, simply tracking the S&P Index would have led to sub-optimal investment results. The opposite was true over more recent periods. While no one knows for sure if the growth-to-value rotation is a long-term market phenomenon, we think that high-quality active managers can add value if such a trend persists into the future.