● U.S. Stocks back at all‐time highs. The S&P 500 closed July near record highs, its sixth consecutive monthly advance. But outside of U.S. large caps, the picture in July was much cloudier. U.S. Small cap fell ‐3.6% and overseas emerging markets plunged ‐6.7%.
● Disappearing act. The yield on the benchmark U.S. 10‐year Treasury yield fell ‐0.25 basis points in July, its largest monthly decline since March 2020. Yields are down for four straight months now, the first such stretch since the first four months of 2020. Yields rose four straight months from 12/20 through 3/21.
● China joins inflation and variants as key concerns. Chinese stocks ended July with steep declines, with Hong Kong’s Hang Seng index tumbling ‐9.9%, while the Shanghai Composite fell ‐5.4%. U.S.‐listed Chinese tech stocks plunged more than ‐22% in July.
● Uneven bars. Economic output is returning to pre‐pandemic levels for major economies but is taking more time for some countries than others. Business activity shows divergent recoveries as the U.S. and eurozone continued to rise in July, but Australia and emerging markets saw much weaker data.
Asset Class Performance
Stocks rallied to record highs again in July as the global economic recovery continued. However, sentiment is at risk as the more contagious Delta variant spreads and creates uncertainty about the recovery and the path to normalcy.
Global economies are largely improving, but at varying rates
The Bureau of Economic Analysis announced at the end of July that the U.S. economy has returned to pre‐pandemic levels for the second quarter through June. Although second quarter U.S. Gross Domestic Product (GDP) came in below economist expectations, growing at a +6.5% annual rate versus the forecast for +8.5%, it showed a robust rebound in household demand and put the U.S. economy above its pre‐pandemic peak on an inflation‐adjusted basis. Bloomberg economists noted that most of the downside surprise was from the trade and inventory components. Excluding trade and inventory showed growth at +7.9%. Further stripping out government spending, in which payments to banks for processing PPP loans caused a non‐recurring drop, put final sales to the domestic sector at +9.9%, an at an all‐time high. The Personal Consumption Expenditures (PCE) price index excluding food and energy costs, followed closely by Fed officials, climbed an annualized +6.1% in the second quarter, the biggest gain since 1983. As shown in the chart to the right, China and India have also surpassed pre‐pandemic economic growth. However, some countries have not kept pace and remain below their pre‐pandemic levels. Many European countries locked down more fully than the U.S. and didn’t have quite as much stimulus. And the fast‐spreading Delta variant is thwarting plans to lift lockdowns or pushing areas to return to restrictions.
In Australia, Sydney was locked down for the first time in more than a year. Indonesia, the fourth most populous country in the world, is experiencing a spike in both infections and deaths. It has resisted tighter restrictions, but with only had about 5% of the country fully vaccinated it began additional curbs in hard‐hit areas. Of course, the Olympic games started which began in late July in Tokyo have no live fans after the government declared a state of emergency for the duration of the games. Nicolas Colas of DataTrek Research pointed to Apple mobility data to show the divergent recoveries and the challenges resulting from different levels of restrictions, infection rates, and vaccination levels. Mobility data in the U.S. and Europe showed positive trends and traffic that was near or above early 2020 levels. But Asia was seeing much lower mobility activity with Sydney under lockdown, Bangkok closing public spaces, and India just starting to ease restrictions after their devastating Delta surge.
The chart of PMI data to the left reflects the stark contrast of deviating business activity with the U.S. and eurozone well into economic expansion but Australia falling back into economic contraction. South America has seen little disruption from the Delta variant but is struggling with its own highly infectious Gamma variant.Bottom Line: The global economy experienced a largely synchronized recovery following the initial COVID‐19 pandemic beginning in the Spring of 2020 and the following year. But different levels of vaccination rates, and subsequent waves of COVID variants across—and within—countries, means the recovery is now increasingly divergent. Rebalancing and risk management will take on additional importance in this more challenging environment.
©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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