Second Quarter 2021 Market Overview

by | Jul 8, 2021 | Investing, Quarterly Market Summary

The second quarter of the year saw strong market returns once again, fueled in part by both a reopening economy and loose monetary and fiscal policy. That’s not to say that there haven’t been any hiccups along the way. Inflation concerns were stoked again when the May year-over-year rise in consumer prices hit 5%, the biggest spike in inflation in the last 13 years[i]. In response, the Federal Reserve increased its expectations for inflation this year while indicating that it may raise interest rates earlier than previously expected[ii]. The Fed maintains its position that inflation is transitory but concerns that inflation may be more long lasting have contributed to market volatility, nonetheless.

We can see the Treasury market ultimately giving the Fed the benefit of the doubt, as the yield on the 10-year bond reached a peak at 1.74% on March 31, before gradually dropping to end the quarter at 1.45%[iii]. As economists and market strategists intensely debate the prospects of sustained inflation, both equity and fixed income markets are for now accepting the Fed’s view.

Large cap stocks outperformed small cap in the second quarter, a reversal of the trend seen in the previous two quarters. Fueled in part by the uncertainty about the pandemic and the economy, the big growth stocks that did so well in 2020 saw strong returns this past quarter.

Small cap stocks still did well on an absolute basis for the quarter. Their outperformance in the first quarter was so pronounced that they have the largest gain by a good margin on a year-to-date basis.

Developed and emerging markets also had a strong quarter but underperformed large cap US stocks. The dollar weakened in the quarter, boosting overseas returns for US based investors. Varying vaccine rollouts in emerging markets relative to developed markets are creating additional hurdles for their economies.

Value continued to outperform growth in US small cap stocks and emerging markets, but growth stocks outperformed in the large cap sector, fueled by the big tech names that were hobbled in the first quarter. The rotation into either value or growth stock sectors seems to change with the sentiment about reopening economies, with value stocks being boosted by optimism and growth stocks benefitting from concerns about economic growth.

Bond markets reversed the trend seen in the first quarter as US investment grade bonds gained back about half of their first quarter drop. Municipal bonds remained relatively flat but still positive. Lower credit quality bonds, which tend to be more correlated to stocks, saw a meaningful rally in the second quarter as the search for higher yields continued. Emerging Markets bonds had the strongest rebound of the bond indices shown, driven in part by the weakening US dollar.

Just when as it looks as if we might have calmer waters ahead, something seems to stir the pot; while overall market volatility has declined since last year, there has been a lot of movement within the market, among sectors and styles.[iv] There is still much uncertainty in capital markets, but it seems that the good is generally outweighing the bad–and investors who have stayed with well-diversified portfolios have been able to participate fully.

 

 

[i] Guilford, G., 2021. U.S. Inflation Is Highest in 13 Years as Prices Surge 5%. [online] WSJ. Available at: <https://www.wsj.com/articles/us-inflation-consumer-price-index-may-2021-11623288303> [Accessed 2 July 2021].

[ii] Cox, J., 2021. [online] Available at: <https://www.cnbc.com/2021/06/16/fed-holds-rates-steady-but-raises-inflation-expectations-sharply-and-makes-no-mention-of-taper.html> [Accessed 2 July 2021].
[iii] Source: Treasury.gov.

[iv] Mackintosh, J., 2021. The Stock Market Hasn’t Been This Placid in Years. [online] WSJ. Available at: <https://www.wsj.com/articles/the-stock-market-hasnt-been-this-placid-in-years-11624740199?mod=searchresults_pos2&page=1> [Accessed 2 July 2021].

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Index Descriptions

  • Dow Jones Industrial Average Index: measures the performance of 30 large, publicly-owned companies trading on the New York Stock Exchange (NYSE) and the NASDAQ.
  • Russell 3000 Index (U.S. Stock Market): measures the performance of the largest 3,000 U.S. companies representing approximately 98% of the investable U.S. equity market. These securities are traded on the NYSE, NYSE MKT, and NASDAQ.
  • S&P 500 Index (Large Cap U.S. Stocks): measures the performance of large capitalization U.S. Stocks. It is a market-value-weighted index of 500 stocks that are traded on the NYSE, NYSE MKT, and NASDAQ. The weightings make each company’s influence on the Index performance directly proportional to that company’s market value.
  • Russell 2000 Index (Small Cap U.S. Stocks): An unmanaged index that measures the performance of the small-cap segment of the U.S. equity universe. It is a subset of the Russell 3000 Index, representing approximately 10% of the total market capitalization of that index and includes approximately 2,000 of the smallest securities based on a combination of their market cap and current index membership. Russell Investment Group owns the Russell Index data, including all applicable trademarks and copyrights.
  • Russell 2000 Value Index (Small cap Value): An unmanaged index that measures the performance of small-cap value segment of the U.S. equity universe. It includes those Russell 2000 companies with lower price-to-book ratios and lower forecasted growth values.
  • Russell 1000 Value Index (Large Cap Value): An unmanaged index that measures the performance of the large-cap segment of the U.S. equity universe. It is a subset of the larger Russell 3000 Index and represents the 1000 top companies by market capitalization in the United States.
  • MSCI EAFE Index (International Developed Stocks): The MSCI EAFE Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization-weighted index that is designed to measure the equity market performance of developed markets, excluding the U.S. & Canada. The MSCI EAFE Index consists of the following 22 developed market country indices: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and the United Kingdom.
  • MSCI Emerging Markets Index (Emerging Markets Stocks): is a Morgan Stanley Capital International Index that is designed to measure the performance of equity markets in 23 emerging countries around the world.
  • Bloomberg Barclays US Aggregate Bond Index (U.S. Bond Market or Investment Grade U.S. Bonds): includes U.S. government, corporate, and mortgage-backed securities with maturities of at least one year.
  • Bloomberg Barclays Muni Bond Index 1-10 Yr Blend (1-12) (Int-Term Municipal Bonds or US Municipal Bonds): A market value-weighted index which covers the short and intermediate components of the Barclays Capital Municipal Bond Index. The 1-10 Year Municipal Blend index tracks tax-exempt municipal General Obligation, Revenue, Insured, and Prerefunded bonds with a minimum $5 million par amount outstanding, issued as part of a transaction of at least $50 million, and with a remaining maturity from 1 up to (but not including) 12 years.
  • ICE BofA Merrill Lynch U.S. High Yield, BB-B Rated, Constrained Index (High Yield U.S. Bonds): Tracks the performance of US dollar-denominated below-investment-grade (BBB rated) corporate debt publicly issued in the US domestic market. Qualifying bonds are capitalization-weighted provided the total allocation to an individual issuer does not exceed 2%. Issuers that exceed the limit are reduced to 2% and the face value of each of their bonds is adjusted on a pro-rata basis.
  • JPM GBI EM GD USD Unhedged Index (Emerging Markets Bonds): The JP Morgan EMBI Global Diversified is a uniquely weighted index that tracks total returns for U.S. dollar-denominated Brady bonds, Eurobonds, traded loans, and local market debt instruments issued by sovereign and quasi-sovereign entities. The index limits the weights of countries with larger debt stocks by only including a specified portion of these countries’ eligible current face amounts of debt outstanding.
  • JPM EMBI GD Index: J.P. Morgan Emerging Markets Bond Global Diversified Index (EMBI Global Diversified) tracks the returns for U.S. dollar-denominated debt instruments issued by emerging market sovereign and quasi- sovereign entities: Brady bonds, loans, Eurobonds. The index limits the exposure of some of the larger countries.