July Newsletter

Bill Hastie |

The U.S. equity markets experienced considerable volatility in June but ended the first six months of 2021 with solid gains.  But along the way, however, the S&P 500 got whipsawed in June – by June 8, the S&P 500 was up 6.2% for the month, but by June 11, the S&P 500 was down 1.32% for the month.  The benchmark index finished June up 2.33%, while the Dow and NASDAQ were up 0.02% and 5.55%, respectively, for June.

A notable rotation from technology stocks to economically sensitive stocks - known as cyclical stocks, began last November and was in full swing by early 2021.  In months when the reopening of the economy looked to be full steam ahead these cyclical stocks, primarily financial, industrials and energy stocks, posted solid gains.  But this was not the case in June as the COVID delta variant and a spike in daily new cases prompted mask mandates in Los Angeles and fears of additional economic lockdowns. This briefly rattled investors and turned their focus back to technology and growth was back on top.  Large and small cap growth stocks gained 4.35% and 3.84%, respectively, while large cap value dropped 0.66% and small cap value gained 2.90%.

Foreign stocks, measured by the MSCI EAFE and MSCI Emerging Markets, were mixed.  The EAFE dropped 1.13% for the month, but the Emerging Markets gained 0.21%.

Rising interest rates and inflation have caused the Federal Reserve to swiftly enact several market operations that have helped propel recovery in the bond market.  While the Bloomberg Barclays Capital Aggregate lost more than 3.7% in the 1st quarter of 2021, gained 0.70% in June as high yield corporate bonds gained 1.34%.  This performance reflects the recent dip in interest rates, from a high on the 10-year Treasury yield of 1.72% last April to about 1.4% in June.

By any economic measure, higher inflation than the Fed had expected should result in higher interest rates in the second quarter of 2021.  Wells Fargo is forecasting this rate could go as high as 2.2% while Goldman Sachs has set a target of 1.9%.

Taking center stage is the up-coming second quarter corporate earnings season which kicks off in mid-July.  Our expectation is that year-over-year earnings will be strong, and Wall Street is calling for possibly the best quarter for earnings since 2009.  According to Bloomberg Intelligence, as of June 25, the expected second-quarter earnings growth rate for the S&P 500 is 59.2%.  But note the state of the markets in 2008 and 2009 and the economic lockdowns from COVID in 2020, driving booming expectations by market bulls.  But the bears are never far behind, awaiting some reason to finally cause the S&P 500 to fall after surging nearly 40% in the past 12 months.  Currently, the delta variant is causing the markets major concerns over the potential of additional economic lockdowns as we saw last Thursday, July 7.