One Down, Five Up: Stock Recovery Marches On
Plus Q2 Market Report

When Covid-19 sucker-punched the global economy in March 2020, anyone predicting five subsequent quarters of stock market gains would have been laughed out of the room. But that’s exactly where we are today—five quarters of equity growth on the heels of a global economic meltdown. Proving once again that markets don’t follow the wisdom of the crowd or the timelines we expect.

In June the S&P 500 returned 2.33%, pushing its return to 8.55% for the quarter and 15.25% for the first half of the year. Optimists drove markets higher as coronavirus restrictions were lifted and case numbers fell in many areas of the US. Investors were not overly concerned about inflation, adopting the attitude that rising prices for oil, lumber, cars, food and other items were the result of stressed supply chains and temporary imbalances. Treasury yields fell, with the yield on the 10-year Treasury note declining to 1.44% before plummeting to 1.25% during last Thursday's trading session prior to recovering somewhat since then.

Sectors that fared poorly in 2020 made a comeback in the first half of 2021, led by energy stocks (+42.4%), financial stocks (+24.5%) and real estate companies (+21.7%). In comparison, tech companies, the red-hot leader in 2020, added just 13.2% in the first half of the year. Utilities fared the worst, gaining a mere 0.8% over the six-month period. In a sign that sentiment has turned, gold prices suffered their biggest monthly drop in four-and-a half years.

What happens next is anyone’s guess. A great deal of optimism is already priced into the market, and business forecasts are rosy. A boatload of consumer savings is just itching to be spent. People are heading back to work, even as companies shed excess office space and put newfound lessons in productivity to good use. But for all that, recovery could be derailed. Large pockets of the US population remain unvaccinated, particularly in rural areas and the South. Meanwhile, highly contagious variants of the virus account for most new infections. As the virus continues to mutate, it’s possible that it could eventually outfox existing vaccines, creating a new public health nightmare.

Businesses also have to contend with the possibility that corporate and capital gains taxes could increase. The global movement to establish a minimum corporate tax could eliminate traditional tax havens. And what if inflation picks up steam? The Federal Reserve appears ready to pull back on supportive policies if that were to happen. Businesses could feel the pinch on profit margins if workers demand wage increases. Some pressure on wages is already occurring as many returning workers take time to evaluate their options.

The past 15 months have reinforced those markets can, and often do, turn on a dime. Surprisingly strong market performance also highlighted the importance of remaining invested, diversified, and having a plan that accurately reflects your personal risk tolerance. There’s no telling where we go from here. But right now, as we look back on five quarters of equity gains, you may have questions about rebalancing. If so, please contact me. I am here to help.

Now let's take a closer look at Q2 markets.

Q2 2021 Market Report

Courtesy of DFA

World Asset Classes

Second Quarter 2021 Index Returns (%)

Equity markets around the globe posted positive returns in the second quarter. Looking at broad market indices, US and non-US developed markets outperformed emerging markets for the quarter. Value performance was mixed in the US, with small value outperforming small growth but large value underperforming large growth. Value underperformed growth in non-US developed markets and outperformed in emerging markets. Small caps underperformed large caps in the US and non-US developed markets but outperformed in emerging markets. REIT indices outperformed equity market indices in the US and non-US developed markets.

US Stocks (58% of Global Market Cap Weight)

The US equity market posted positive returns for the quarter and outperformed non-US developed markets and emerging markets. Value underperformed growth in large cap stocks but outperformed growth in small cap stocks. Small caps underperformed large caps. REIT indices outperformed equity market indices. ¹

International Developed Stocks (29% of Global Market Cap Weight)

Developed markets outside the US posted positive returns for the quarter, underperforming US equities but outperforming emerging markets. Value underperformed growth. Small caps underperformed large caps.²

Emerging Markets Stocks (13% of Global Market Cap Weight)

Emerging markets posted positive returns for the quarter, underperforming the US and non-US developed equity markets. Value outperformed growth. Small caps outperformed large caps. ³

Real Estate Investment Trusts

US real estate investment trusts outperformed non-US REITs during the quarter. ⁴

US Sector Returns

Sector results continued to be strongly positive. For the quarter, 10 of 11 sectors gained. Real Estate did the best for the quarter, returning 12.31%. Information Technology and Communication Services outperformed the broad market returning 11.30% and 10.48%, respectively, after lagging during the first quarter. Consumer sectors continued to vary, as Consumer Discretionary returned 6.78%, while Consumer Staples, returned 3.17% for the quarter. Financials continued up, adding 7.93%. Utilities fell 1.23% for the period.

Fixed Income

Changes in interest rates in the US Treasury fixed income market were generally mixed during the second quarter of 2021. The yield on the 5-Year Treasury note decreased 7 basis points (bps) to 0.88%. The yield on the 10-Year T-note decreased 28 bps to 1.46%. The 30-Year Treasury bond yield declined 35 bps to 2.04%. On the short end of the yield curve, the 1-Month US Treasury bill yield remained unchanged at 0.05%, and the 1-Year T-bill yield increased 2 basis point to 0.10%. The 2-Year Treasury note increased 10 bps to 0.25%. In terms of total returns, short-term corporate bonds gained 0.70%. Intermediate-term corporate bonds returned 1.70%. The total return for short-term municipal bonds was 0.30%, while intermediate-term munis returned 0.80%. Revenue bonds outperformed general obligation bonds. ⁵

Global Fixed Income

Changes in government bond yields in the global developed markets were mixed for the quarter. Term premiums were mixed in developed markets. Short- and intermediate-term nominal interest rates were negative in Japan and Germany.

Commodities

The Bloomberg Commodity Index Total Return returned 13.3% for the second quarter of 2021. Soybean Oil and Natural Gas were the best performers, returning 31.82% and 30.29%, respectively. Soybean Meal and Live Cattle were the worst performers, declining 12.66% and 2.77%, respectively. ⁶

Impact of Diversification

These portfolios illustrate the performance of different global stock/bond mixes and highlight the benefits of diversification. Mixes with larger allocations to stocks are considered riskier but have higher expected returns over time. ⁷

1. Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Market segment (index representation) as follows: Marketwide (Russell 3000 Index), Large Cap (Russell 1000 Index), Large Cap Value (Russell 1000 Value Index), Large Cap Growth (Russell 1000 Growth Index), Small Cap (Russell 2000 Index), Small Cap Value (Russell 1000 Value Index), and Small Cap Growth (Russell 2000 Growth Index). World Market Cap represented by Russell 3000 Index, MSCI World ex USA IMI Index, and MSCI Emerging Markets IMI Index. Russell 3000 Index is used as the proxy for the US market. Dow Jones US Select REIT Index used as proxy for the US REIT market. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. MSCI data © MSCI 2021, all rights reserved.

2. Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Market segment (index representation) as follows: Large Cap (MSCI World ex USA Index), Small Cap (MSCI World ex USA Small Cap Index), Value (MSCI World ex USA Value Index), and Growth (MSCI World ex USA Growth Index). All index returns are net of withholding tax on dividends. World Market Cap represented by Russell 3000 Index, MSCI World ex USA IMI Index, and MSCI Emerging Markets IMI Index. MSCI World ex USA IMI Index is used as the proxy for the International Developed market. MSCI data © MSCI 2021, all rights reserved. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes.

3. Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Market segment (index representation) as follows: Large Cap (MSCI Emerging Markets Index), Small Cap (MSCI Emerging Markets Small Cap Index), Value (MSCI Emerging Markets Value Index), and Growth (MSCI Emerging Markets Growth Index). All index returns are net of withholding tax on dividends. World Market Cap represented by Russell 3000 Index, MSCI World ex USA IMI Index, and MSCI Emerging Markets IMI Index. MSCI Emerging Markets IMI Index used as the proxy for the emerging market portion of the market. MSCI data © MSCI 2021, all rights reserved. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes.

4. Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Number of REIT stocks and total value based on the two indices. All index returns are net of withholding tax on dividends. Total value of REIT stocks represented by Dow Jones US Select REIT Index and the S&P Global ex US REIT Index. Dow Jones US Select REIT Index used as proxy for the US market, and S&P Global ex US REIT Index used as proxy for the World ex US market. Dow Jones and S&P data © 2021 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.

5. One basis point (bps) equals 0.01%. Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Yield curve data from Federal Reserve. State and local bonds are from the S&P National AMT-Free Municipal Bond Index. AAA-AA Corporates represent the Bank of America Merrill Lynch US Corporates, AA-AAA rated. A-BBB Corporates represent the ICE BofA Corporates, BBB-A rated. Bloomberg Barclays data provided by Bloomberg.  US long-term bonds, bills, inflation, and fixed income factor data © Stocks, Bonds, Bills, and Inflation (SBBI) Yearbook™, Ibbotson Associates, Chicago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield). FTSE fixed income indices © 2021 FTSE Fixed Income LLC, all rights reserved. ICE BofA index data © 2021 ICE Data Indices, LLC. S&P data © 2021 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.

6. Past performance is not a guarantee of future results. Index is not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Commodities returns represent the return of the Bloomberg Commodity Total Return Index. Individual commodities are sub-index values of the Bloomberg Commodity Total Return Index. Data provided by Bloomberg.

7. SD (standard deviation) is a measure of the variation or dispersion of a set of data points. Standard deviations are often used to quantify the historical return volatility of a security or portfolio. Diversification does not eliminate the risk of market loss. Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect expenses associated with the management of an actual portfolio. Asset allocations and the hypothetical index portfolio returns are for illustrative purposes only and do not represent actual performance. Global Stocks represented by MSCI All Country World Index (gross div.) and Treasury Bills represented by US One-Month Treasury Bills. Globally diversified allocations rebalanced monthly, no withdrawals. Data © MSCI 2021, all rights reserved. Treasury bills © Stocks, Bonds, Bills, and Inflation Yearbook™, Ibbotson Associates, Chicago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield).

Regards,

John Gorlow
President
Cardiff Park Advisors
888.332.2238 Toll Free
760.635.7526 Direct
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760.284.5550 Fax
jgorlow@cardiffpark.com