Quick Takes
● Global recovery lifts all boats. International bonds and stocks fell in June, but all major asset classes were up in Q2 as the global synchronized recovery continued. Economic activity is expansionary globally and earnings are improving globally.
● Dollar dependent. The direction of the U.S. dollar (USD) has historically been a key contributor to international asset’s performance. In May USD weakness led to international stock and bond outperformance, but in June USD strength led to international assets underperforming.
● The U.S. continues to lead the way. Whether it’s the economy, earnings or markets, the U.S. continues to lead the global recovery. June capped the fifth straight positive month for U.S. stocks and the fifth straight positive quarter, the best streak since 2017.
● Inflation and variants are keys to the outlook. Two of the biggest issues that will shape market and economic behavior in the second half of 2021 are 1) whether inflation is “transitory” or not, and 2) whether vaccinations can mitigate new COVID-19 variants sufficiently to avoid further restrictions.
Asset Class Performance
In a counter trend move from May, June saw the U.S. dollar jump 2.9% and that contributed to international equities and bonds being the only broad asset classes to drop in June. But for the second quarter all asset classes gained.
Stocks sail to records behind vaccinations & improving economies
Stocks closed out June, the second quarter, and the first half of the year with the S&P 500 hitting 4,297.50, an all-time high. It was the fifth consecutive month and the fifth consecutive quarter of positive returns for the S&P. That’s the longest quarterly streak since a nine-quarter stretch that lasted through 2017. And the performance of those five quarters has ranged from +6.2% to +20.5%. Research from Bespoke Investment Group shows that the only other time the S&P 500 has had at least five straight quarters of more than +5% gains was in the mid-1950s – and the following year its was up another +25%. Numerous tailwinds are behind the strong stock performance, with vaccination rates improving, economic activity solidly expanding, and earnings accelerating. More than 325 million COVID-19 vaccinations have been administered in the U.S. with now more than 57%of U.S. adults now vaccinated. Importantly, 90% of the 65+ age group, a cohort that represents over 80% of COVID-19 deaths, are 90% vaccinated. As a result deaths are down -93% from their January peak, a new pandemic low. Meanwhile vaccination campaigns continued to accelerate overseas with Europe now catching up with the U.S. and U.K. With economies opening robust demand for consumer goods has resulted in strong manufacturing activity and as COVID restrictions are lifted services activity is accelerating from consumers that are flush with cash from savings, stimulus checks, and expanded unemployment insurance programs. Earnings for the second quarter will start being reported in the next few weeks and they have a high hurdle
after Q1 which was the best quarterly year-over-year earnings growth since Q1 of 2010. J.P. Morgan is forecasting an earnings surprise of +14.6% for S&P 500 companies for the second quarter. That’s lower than the last four quarters but still well above the long-run average of 7%. Moreover, Bespoke Investment Group notes that since June began stocks have reacted more positively to earnings reports than in Q1. For multi-asset class investors, the good news didn’t end with equities. The Bloomberg Barclays US Aggregate Index was up+0.7% in June and +1.8% for the quarter – its eleventh gain over the last twelve quarters and its best quarter since the depths of the pandemic in 2Q-2020. Investment Grade bonds id even better in June, rising 1.6% and +3.5% for the quarter. Bonds benefitted from narrowing yield spreads and declining Treasury yields. 
Yields on 10-Year U.S. Treasury fell -13 basis points in June and -27 basis points over the quarter, to their lowest levels, 1.47%, since early March. Commodities also continue to work, gaining +1.8 in June and +13.3% for the quarter, the best quarter since Q4-2010, and the sixth positive quarter in the last seven. They’ve benefitted from a U.S. dollar that has declined in four of the last five quarters, though the buck bucked the trend in June, rising +2.9%.
Bottom Line: The bull market is now in its second year and positive trends on the vaccination, earnings and economic fronts are supportive of the breakout to new highs. An accommodative Fed should also continue to help support equities, even at stretched valuations.
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©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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Registered Investment Adviser. PCIA doing business as Prime Capital Wealth Management
(“PCWM”) and Qualified Plan Advisors (“QPA”).
© 2021 Prime Capital Investment Advisors, 6201 College Blvd., 7th Floor, Overland Park, KS 66211.
that jumped +26.6%. Gains like those, even off the extraordinarily low bases from the depths of last year’s COVID lockdowns, are bound to create inflation concerns. U.S. stocks pulled back more than ‐4% from the May 7th all‐time highs in both the second and third weeks of the month, and VIX volatility spiked to about 28 and 26 on each of those declines. But in the end the bulls took the victory as investors pushed aside the inflation fears in favor of recovery optimism. The S&P 500 rose +0.7% to post its fourth consecutive positive month, and sixth of the past seven. The small‐cap Russell 2000 index, which is more leveraged to the economic reopening, posted its eighth straight positive month for the first time since 1995.
Importantly, vaccination rates in Europe have picked up after a relatively slow start. That has helped Eurozone economic sentiment improve for four straight months and hit its highest level since 2018.The COVID crisis in India has also made much needed progress with over 190 million vaccines so far administered–only behind the totals of US and China. As a result, those economies are also rebounding nicely. As seen in the chart above, both developed and emerging international PMIs are rising and are well into expansion levels (above 50). The MSCI EAFE Index gained +3.3% in May, outperforming U.S. stocks for the first time in 2021.
