Fidelity Bank - Wealth Management
June 2021 – Second Quarter Market Review
Throughout second quarter, stocks rose as vaccination efforts continued to accelerate as most developed economies started catching up with the US’s vaccine program. Emerging economies continued to lag on the vaccination campaign, but cases seem to have peaked in India. The 10-year US Treasury yield fell around 30 basis points to end June 1.469%. This interest rate decline helped Growth Stocks make up some ground they lost to Value Stocks in the first quarter. The S&P 500 gained 2.33% in June and 8.55% for the quarter. The Bloomberg Barclays US Aggregate Bond Index gained 0.70% in June and 1.83% for the second quarter as falling rates boosted bond prices.
Covid-related economic restrictions in most developed markets continued to ease. Economic data over the last three months has generally been very strong, especially in the US. However, the reopening of economies and the quick rebound in activity that has followed has fueled inflation fears. Some see the meteoric rise in some of the underlying data points, such as the more than 31% increase since June 2020 in used car and truck prices, as temporary factors. By analyzing elements such as this, the Federal Reserve continues to see inflation increases as transitory. However, The Federal Reserve has become slightly more hawkish, acknowledging that tapering monetary stimulus programs is being discussed. The median FOMC participant also now expects two rate hikes by the end of 2023. The Federal Reserve continues to target a long-term 2% inflation goal and has indicated a willingness to allow inflation to trend above 2% in the short-term. During the quarter, market implied inflation peaked at 2.56% in May but ended June at 2.33% as inflation concerns cooled.
Declining Treasury rates throughout the second quarter helped long duration Large Cap Growth Stocks beat shorter duration Large Cap Value Stocks by about 6.70. However, year-to-date, Large Value is outperforming Large Growth by more than 4%. Interestingly, from a factor perspective, those stocks with the highest degree of exposure to the “Value Factor” underperformed those with the least value exposure by 12.9% in June. Year-to-date, however, companies with the most exposure to the “Value Factor” are outperforming the least value exposed companies by 19.44%.
All Global Industry Classification (GIC) sectors except Utilities were positive in the second quarter of 2021. Real Estate, Technology, and Energy were the leaders advancing 13.09%, 11.56%, and 11.11%, respectively. Year-to-date, Energy and Financials are leading the way gaining 45.22% and 23.61%, respectively.
As the Treasury rates faded in the second quarter, the US Dollar weakened by more than by 0.85% versus developed market currencies. Versus emerging market currencies the dollar weakened by 2.21% from April through June and at one point was weaker by more than 3.25%. The weaker US Dollar enhanced returns for US investors in both international developed and emerging markets. For the second quarter, the MSCI EAFE index gained 4.79% in local currency terms but gained 5.17% in US Dollar terms. A similar story played out in Emerging Markets; the MSCI Emerging Markets Index gained 3.83% in local currency and the conversion to US Dollars increased that gain to 5.05% for US investors.
Fixed Income investors were provided some welcome reprieve from rising longer-term interest rates in the second quarter. The 10-year Treasury fell by around 30 basis point from 1.75% to 1.46% at the end of June. Falling rates boasted Treasury prices by 1.75% and US Investment Grade Corporate Bond by 3.55% in the second quarter.
Falling rates and tightening spreads helped High Yield Bonds return 2.74% in the second quarter. Investors’ thirst for yield has pushed spreads to historically low levels. As of month end, High Yield Bonds’ option adjusted spread (OAS) is now only 2.68% above Treasuries. This represents a more than 1 standard deviation event with monthly data going back to 1994. From a yield to worst perspective, the spread between High Yield Bonds and 10-year Treasuries is only 2.28%, the lowest level ever with monthly data going back to 1986.
Emerging Market Local Currency Debt welcomed the weakness in the US Dollar. For the quarter, EM Debt gained 3.54%. Year-to-date the asset class is down 3.38%.
The Bloomberg Commodities Index jumped 13.30% in the second quarter as rising inflation expectations and demand boosted prices. Energy led the way gain 23.23% in the three-month period. WTI Crude Oil jumped over 24% during the quarter. The bubble has seemed to have burst in Lumber Futures prices. Lumber Futures surged coming out of the Covid lockdowns as stiff demand for lumber for renovation projects and new construction coupled with tight supply. Since the middle of May, Lumber Futures are down more than 57%.
Real Estate Investment Trusts (REITs) bounded higher by 12.03% in the second quarter. REITS, which have struggled as a result of the pandemic, rose as confidence in the economic recovery, positive vaccine news, and consumer data helped propel the asset class forward. Year-to-date REITs are outpacing the S&P 500 by 6.10% (21.35% vs. 15.25%).
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June 2021 Market Review is intended solely to report on various investment views held by Fidelity Deposit & Discount Bank and is distributed for informational and educational purposes only and is not intended to constitute legal, tax, accounting, or investment advice. Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. Fidelity Deposit & Discount Bank does not have any obligation to provide revised opinions in the event of changed circumstances. All data is provided by Bloomberg Finance, LP and Morningstar Direct. We believe the information provided here is reliable but should not be assumed to be accurate or complete. Data, if not otherwise noted, is as of 6/30/2021. References to specific securities, asset classes and financial markets are for illustrative purposes only and do not constitute a solicitation, offer or recommendation to purchase or sell a security. Past performance is no guarantee of future results. All investment strategies and investments involve risk of loss and nothing within this report should be construed as a guarantee of any specific outcome or profit. Investors should make their own investment decisions based on their specific investment objectives and financial circumstances and are encouraged to seek professional advice before making any decisions. Index performance does not reflect the deduction of any fees and expenses, and if deducted, performance would be reduced. Indexes are unmanaged and investors are not able to invest directly into any index. The S&P 500 Index is a market index generally considered representative of the stock market as a whole. The index focuses on the large‐cap segment of the U.S. equities market.