As the month went on, the volatility continued, but risk assets went on a final run towards the end of the month with almost all asset classes ending in the green for May. Check out the latest Month in Review.
From asset class performance to the Fed’s monetary policy in the midst of peak inflation, Prime Capital Investment Advisors’ Research Team has done the deep dive to bring you the information you need to know now. Check out the April Month in Review.
Domestic and International Developed equities posted a month in the green but remain in the red for the year thus far. Bonds and Emerging Markets continued their year-to-date rut.
With risk assets now fighting on two fronts-persistent inflation and a conflict between Russia and Ukraine-nearly all asset classes posted a negative month for the month of February.
With the Fed promising to take aggressive action against rising inflation, market participants spent the month of January in risk off mode, sending all asset classes into the red for the first month of 2022.
The month of December initially began with traders pricing in a new covid-19 variant’s impact (omicron variant) on markets, but eventually shook off their concerns and turned their attention back to the Federal Reserve.
Equities, especially international, plummeted for the month of September as the delta variant continued to work its way through populations and a new variant threatens the globe.
Equities warmed up as the weather cooled off. Risk assets were buoyed by the start of a strong earnings season, the S&P 500 had its best month since November of 2020 and most indices were in the green for October.
Risk assets hit a speed bump. September ended deeply in the red for risk assets as global growth concerns began to weigh on the market. September is the first negative month since January and the worst month since March of 2020.
● Steady ascent. Despite higher COVID cases, rising geopolitical risks, mounting inflation fears, the looming Fed tapering, and waning economic growth, stocks continued their steady ascent with the S&P 500 closing August just below its all-time high.
● Delta damage. With Delta progressively spreading throughout the month, August saw a pullback in consumer activity, with notable declines in visits to Gyms, Grocery Stores, Restaurants, and Retailers. Air passenger traffic also rolled over in August after nearing pre-pandemic levels in June and July.
● Earnings exploding. With less than a handful of companies left to report earnings for the second quarter of 2021, data from FactSet shows the reported year-over-year growth in earnings is 91%–the highest growth since the fourth quarter of 2009.
● Expectations eroding. In the first two quarters of the year, economic results were consistently exceeding expectations. Since the beginning of July, and gaining downside momentum in August, a reversal of this dynamic has resulted in the vast majority of economic data now falling short of expectations.
Asset Class Performance
Returns for most major asset classes were relatively muted in August as U.S. and International Equities were up a bit, while U.S. and International Bonds declined slightly. Bonds are the only asset classes still negative for the year.
Stocks set records despite mixed economics and delta variant
August, traditionally a tepid month for stocks, ended on a high note with the S&P 500 closing at 4,522.68, up from July’s close of 4,395.26 and now the seventh consecutive month of gains. The S&P is now up a healthy +20.41% for 2021. Domestic equities weren’t the only ones to rise during August, European equities rose +1.98% for the month as did Japanese equities, up +2.95% for August. While markets were optimistic, some of the economic releases for the month painted a more mixed picture. On a positive note, CPI metrics came in largely in-line with expectations, which is more consistent with the Fed’s narrative of transitory inflation. Regardless, consumers are beginning to feel the pressures of rising prices and it weighted on Consumer Confidence. The University of Michigan’s Sentiment survey reached its lowest level since 2013 at 70.3. Manufacturing data also retracted, with ISM’s gauge of factory activity falling for a second month in a row, illustrating that supply chain bottlenecks and difficulty hiring labor, especially skilled labor, is still prevalent. Consumers have been hesitant to return to work as the delta variant spread has increased over the summer months, as illustrated in the chart below.
Additionally, the fear of mask mandates and lockdowns returning has curbed consumer spending which fell to +0.3%for the month of July, missing expectations of +0.4%, and well below the prior month’s release of +1.1%. The miss on Consumer Spending came from softer than expected retail goods and automobiles, but service spending increased. If consumer spending continues to soften into the second half of the year, it could lead to stagnating the economic recovery. Despite consumers pessimism, Incomes surged +1.1%, crushing expectations of +0.3%. The advance was due to Child Tax Credit payments, which more than offset a decline in unemployment benefits, which have been tapering off in recent months as the economic recovery progresses. Overall, consumers remain in one of the best financial standpoints in history. Consumers aren’t alone, corporations are posting some of their strongest earnings in history. As earnings season wound down at the end of August, S&P 500 constituents posted a revenue surprise of 4.9% in aggregate, the largest surprise percentage since FactSet began tracking the metric in 2008 and well above the five-year average of 1.46% (dotted line in the chart above). The unprecedented amount of stimulus distributed by the Fed and Congress has been a significant boon to corporations’ top lines. The Q2 sales growth has helped justify stretched valuations, JPMorgan Asset Management reported S&P 500 YTD earnings growth of 19.7% and multiples have compressed down -5.3%. Despite this compression, P/E ratios remain elevated at 21.5x, versus their 5-year average of 16.3x on the S&P 500.
Bottom Line: Equities continue to grind higher despite lofty valuations, temporary setbacks in the economic recovery due to supply chain constraints and labor shortages, the spread of the delta variant, and hesitant consumers. If trends begin to develop in any of these risks, it may stagnant the economic recovery.
©2021 Prime Capital Investment Advisors, LLC. The views and information contained herein are (1) for informational purposes only, (2) are not to be taken as a recommendation to buy or sell any investment, and (3) should not be construed or acted upon as individualized investment advice. The information contained herein was obtained from sources we believe to be reliable but is not guaranteed as to its accuracy or completeness. Investing involves risk. Investors should be prepared to bear loss, including total loss of principal. Diversification does not guarantee investment returns and does not eliminate the risk of loss. Past performance is no guarantee of comparable future results.
Source: Bloomberg. Asset‐class performance is presented by using market returns from an exchange‐traded fund (ETF) proxy that best represents its respective broad asset class. Returns shown are net of fund fees for and do not necessarily represent performance of specific mutual funds and/or exchange‐traded funds recommended by the Prime Capital Investment Advisors. The performance of those funds may be substantially different than the performance of the broad asset classes and to proxy ETFs represented here. U.S. Bonds (iShares Core U.S. Aggregate Bond ETF); High‐YieldBond(iShares iBoxx $ High Yield Corporate Bond ETF); Intl Bonds (SPDR® Bloomberg Barclays International Corporate Bond ETF); Large Growth (iShares Russell 1000 Growth ETF); Large Value (iShares Russell 1000 ValueETF);MidGrowth(iSharesRussell Mid‐CapGrowthETF);MidValue (iSharesRussell Mid‐Cap Value ETF); Small Growth (iShares Russell 2000 Growth ETF); Small Value (iShares Russell 2000 Value ETF); Intl Equity (iShares MSCI EAFE ETF); Emg Markets (iShares MSCI Emerging Markets ETF); and Real Estate (iShares U.S. Real Estate ETF). The return displayed as “Allocation” is a weighted average of the ETF proxies shown as represented by: 30% U.S. Bonds, 5% International Bonds, 5% High Yield Bonds, 10% Large Growth, 10% Large Value, 4% Mid Growth, 4%Mid Value, 2% Small Growth, 2% Small Value, 18% International Stock, 7% Emerging Markets, 3% Real Estate.
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(“PCWM”) and Qualified Plan Advisors (“QPA”).
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