While the deck of cards that market participants base their investment decisions upon has remained constant since COVID-19 changed the global dynamic 18 months ago, continued reshuffling of that deck has catalyzed significant month-to-month volatility across asset classes, equity sectors and factors. Unprecedented levels of liquidity remains the dominant variable pushing equity indices higher, yet larger-than-expected rates of deceleration in the American and Chinese economies (please see graph below), combined with fears surrounding the Delta variant, caused the growth style of investing to continue to outperform value during August.
Led by macro cap technology stocks and long-term government bonds, financial markets added to their year-to-date gains during July 2021 amidst growing concerns that, not only has the rate of acceleration in economic growth peaked, but it is transitioning to markedly slower levels. This note will table some thoughts germane to that discussion, but first let’s recap last month. As can be seen from the 18-month graph below, the strong correlation between falling yields and the outperformance of the tech-dominant NASDAQ has continued of late.
When we published our 2021 Market Lookahead commentary (December Commentary) in early January, it was an easy call to be bullish on stocks. The pitch was simple and the majority of buy and sell-siders shared similar outlooks. Unprecedented stimulus, albeit higher but still low interest rates and an expected flow of funds into stocks partially supported by declining volatility. With the S&P 500 having closed last week at 4,352 the outlook call gets tougher for long-only managers and especially sell-side equity strategists who have a propensity to be bullish. Interest rates remain surprisingly low and, as can be seen from the right side of the first graph, declining volatility (yellow line) continues to boost the capital allocation to stocks (white line) for traders targeting portfolio volatility of 10%.
With America shifting to a ‘getting back to normal’, no mask stance, investors began May 2021 exhibiting a ‘risk on’ attitude, enabling stocks to advance strongly out of the gate. As can be seen from the 1st graph below, the general trend of the past seven months (since Pfizer’s vaccine news of Nov. 9th) favouring value, cyclical and ‘re-opening’ stocks, continued during early May. By mid-May, the combination of a weak U.S. jobs report and hotter-than-expected pricing data south of our border, triggered a rethink among investors, catalyzing the 2nd factor reversal year to date. Judging by the lack of reaction in bond yields shown in the 2nd graph below, it’s apparent that, for now, investors chalked the miss on jobs to timing and have given the Fed a free pass on its ‘transient’ attitude towards inflation. Most equities recovered, though value bettered growth, yet lingering investor uncertainty made a sustainable rise through 4,200; a tough nut to crack for the S&P 500 through the time of writing of this note.