Markets Continue Climb Behind Friendly Federal Reserve, Ongoing Stimulus and Economic Reopening
June marked another solid month for the stock market with the S&P 500, gaining 2.3% and pushing the total return for the first half of the year to 15.3%. While sector leadership has varied, the macro-economic themes of an accommodative Federal Reserve, historic fiscal stimulus and the economic reopening from the COVID-19 shutdowns have provided constant support for markets.
Generally, most equity asset classes have seen year-to-date returns consistent with the S&P 500. Mid Cap stocks (Russell Mid Cap) gained 16.3%; Small Cap stocks (Russell 2000) gained 17.5%; and International stocks (MSCI EAFE), still slow to rebound from COVID-19 challenges, gained 8.8%. Conversely, Fixed Income returns have been muted. Rising interest rates have placed downward pressure on existing bond prices, and as a result, the Barcap Intermediate Govt./Credit Index has fallen 0.9% on the year.
From a sector perspective, performance has varied widely throughout the year. During the first quarter, new COVID-19 cases began declining, and sectors tied to the economic reopening outperformed. Energy gained 32.1%, while Financials and Industrials rose 17.0% and 11.8%, respectively. In the second quarter, rising interest rates plateaued and persistent international COVID-19 cases tempered enthusiasm for the economic reopening. Rather, the “stay-at-home” stocks that performed well in 2020 were among second quarter’s top performers, with the Technology and Communication Services sectors each gaining more than 10%.
What Didn’t Work
Stuck in the middle between the economic reopening and the “stay-at-home” areas of the market are sectors like Consumer Staples, Utilities, and Healthcare. These stocks tend to produce dependable returns at reasonable valuations, and typically have strong records of dividend payment. Unfortunately, these areas have been largely ignored by short-term term investors and have produced an average return of just 6.4% in 2021.
What We’re Watching
As we look into the second half of the year, we continue to see the risks that have been on our radar for the last few months. Political debate about taxation and spending is likely to heat up this summer; a sudden rebound in the U.S. economy is boosting inflation; and the Federal Reserve will meet in late August to discuss their interest rate and bond purchase policies. While all of these events could cause market volatility, we continue to believe the persisting tailwinds of fiscal stimulus, economic reopening, and historic growth will offset any near-term headwinds.
We hope you are enjoying your summer.
Important Disclosures: Past Performance is no guarantee of future results. All investments carry some level of risk. The S&P 500 Index is an unmanaged, market capitalization weighted index of 500 common stocks widely regarded to be representative of the US market in general. Russell 2000® Index (U.S. Small Caps): Measures the performance of the 2,000 smallest companies in the Russell 3000®Index, which represent approximately 10% of the total market capitalization of the Russell 3000® Index. Russell Midcap® Index: Measures the performance of the 800 smallest companies of the Russell 1000® Index, which represents approximately 36% of the total capitalization of the Russell 1000® Index which is a mid‐cap index. MSCI EAFE Index: Measures the equity market performance of developed markets outside of the U.S. & Canada. MSCI EM Index: Captures large and mid cap representation across 24 Emerging Markets countries and covers approximately 85% of the free float-adjusted market capitalization in each country. Barclays Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. Indices are unmanaged and direct investment is not possible. The opinions expressed are those of the author and not necessarily those of Robert W. Baird & Co. Incorporated.