Global Market Commentary - June 2021

| July 12, 2021

Global Equity Markets Mixed in June

Global equity markets were mixed for the month of June, as the larger-caps outperformed the smaller-caps, growth/technology stocks trounced the value names and the mega-caps barely moved. And June also saw investors continuing to struggle between the competing forces of mostly positive economic news on the one hand and inflation worries on the other.

For the month of June:

The DJIA was down 0.1%;
The S&P 500 was up 2.2%;
NASDAQ was up 5.6%; and
The Russell 2000 was up 1.0%.

So far in 2021, the markets have turned in what can only be described as very good performance, as:

The DJIA is up 12.9% YTD;
The S&P 500 is up 14.7% YTD, which is its best first half of the year since 1998 (which was the height of the dot.com bubble);
NASDAQ is up 12.6% YTD; and
The Russell 2000 is up 17.0% YTD.

The themes that drove the markets in June were many: with inflation worries, sooner-than-expected rate hikes, better-than-expected corporate earnings, rising consumer confidence, crazily red-hot housing, rebounding economic data and fast-rising oil prices all competing for center stage.

Volatility, as measured by the VIX, trended down again in June, starting slightly under 18 and ending the month at 15.47.

West Texas Intermediate crude rose again in June, ending the month north of $75/barrel, for a monthly gain of more than $8/barrel, a level not seen since 2018. Further, WTI has climbed more than 50% on the year, having started 2021 at about $48/barrel.

Market Performance Around the World

Investors looking outside the U.S. saw mixed performance, as only 14 of the 35 developed markets tracked by MSCI were positive for the month of June, which is a far cry from May’s performance which saw all 35 painted green. And of the 40 developing markets tracked by MSCI, only 16 of those were positive in June, with the MSCI EFM Africa dropping more than 7%.

Sector Performance Was Mixed

For the month of June, sector performance was mixed, as only 5 of the 11 sectors ended the month in the red, which is slightly worse than what we saw in May when only 3 were red.

But as has been the case for some time, the range in sector-returns was wide, with Information Technology up almost 7% and Materials down more than 5%. And looking under the hood of sector returns, we can see another sector rotation emerging, as Information Technology moved to the front of the pack for the month, after bringing up the rear in May.

In addition, last month’s winners (Financials and Materials specifically) were among this month’s losers. And the Utilities sector was the only sector keeping its trend intact from the previous month, but it’s not a good trend as both May and June were negative.

Here are the sector returns for the month of June as well as May (two very short time-periods):

Inflation Worries

One-third of the way into the month, the U.S. Bureau of Labor Statistics announced that the Consumer Price Index increased 0.6% in May after rising 0.8% in April.

But maybe more importantly, the BLS reported that the overall inflation rate rose to 5% this past year, which is the largest 12-month increase since a 5.4% increase for the period ending August 2008. But that 5% annual inflation figure masks a huge range among the individual components of inflation, as:

The index for full service meals rose 4.1% over the last 12 months, the largest 12-month increase since October 2008
The household furnishings and operations index increased 1.3% in May, its largest monthly increase since January 1976
The index for new vehicles rose 3.3% over the past 12 months, its largest 12-month increase since November 2011
The index for used cars and trucks increased 29.7% over the past year
The index for motor vehicle insurance rose 16.9% over the past year
The energy index rose 28.5% over the past 12 months
The gasoline index rose 56.2% since May 2020, the largest 12-month increase since the period ending April 1980

More Inflation Worries

Then 5 days after the U.S. Bureau of Labor Statistics published CPI data, Wall Street received the Producer Price Index, which calculates and represents the average movement in selling prices from domestic production over time (the PPI is different from the CPI in that it measures costs from the viewpoint of industries that make products, whereas the CPI measure prices from the perspective of consumers).

The Producer Price Index for final demand increased 0.8% in May, seasonally adjusted. Further, final demand prices rose 0.6% in April and 1.0% in March.
But on an unadjusted basis, the final demand index advanced 6.6% for the 12 months ended in May
This was the largest increase since 12-month data were first calculated in November 2010.

Enter the Fed

A few days before the official start of summer on June 21st, Wall Street’s eyes and ears were on the Federal Reserve, and as expected, the FOMC made no changes to the fed funds rate or the pace of asset purchases.

But what was surprising, at least to some, was that the Fed seemed to signal two rate hikes by the end of 2023. Prior to this week’s meeting, expectations were for no rate hikes through 2023 and one or two rate hikes in 2024.

But even more troubling to those who want rates kept low is that seven members of the FOMC indicated that they expected a rate hike next year.

Federal Reserve Chair Jerome Powell seemed accommodative in his remarks following the FOMC policy statement, but it was St. Louis Fed President Bullard who sounded more hawkish in an interview when he acknowledged that he was one of the seven calling for a rate hike next year.

More Positive Earnings Guidance

Research firm FactSet reported on June 28th that 103 S&P 500 companies have issued EPS guidance for the quarter, which is above the five-year average of 100. Further: “of these 103 companies, 37 have issued negative EPS guidance and 66 have issued positive EPS guidance. The number of companies issuing negative EPS guidance is well below the five-year average of 63, while the number of companies issuing positive EPS guidance is well above the five-year average of 37.”

“If 66 is the final number of S&P 500 companies issuing positive EPS guidance for the quarter, it will mark the highest number of S&P 500 companies issuing positive EPS guidance for a quarter since FactSet began tracking this metric in 2006. The current record is 59, which occurred in the previous quarter (Q1 2021).”

Red Hot Housing Market

Late in the month, the National Association of Realtors announced that existing-home sales decreased for a fourth straight month in May. Further, only one major U.S. region recorded a month-over- month increase, while the other three regions saw sales decline. However, each of the four areas again registered double-digit year-over-year gains, which is not surprising given the state of the real estate market and the economy in general this time last year.

According to the release from the NAR, total existing- home sales – completed transactions that include single-family homes, townhomes, condominiums, and co-ops – dropped 0.9% from April to an annual rate of 5.80 million in May. But sales in total were up a stunning 44.6% from just one year ago (May 2020).

The NAR further reported that:

The median existing-home price for all housing types in May was $350,300, up 23.6% from May 2020 ($283,500), as every region registered price increases.
This is a record high and marks 111 straight months of year-over-year gains since March 2012.
Total housing inventory at the end of May amounted to 1.23 million units, up 7.0% from April's inventory and down 20.6% from one year ago (1.55 million).
Unsold inventory sits at a 2.5-month supply at the present sales pace, marginally up from April's 2.4-month supply but down from 4.6- months in May 2020.
Properties typically remained on the market for 17 days in May, unchanged from April and down from 26 days in May 2020.
Eighty-nine percent of the homes sold in May 2021 were on the market for less than a month.

Regional Home Prices

For the second straight month, only the Midwest experienced higher sales from the prior month.

Existing-home sales in the Northeast decreased 1.4% in May, but the annual rate of 720,000 is a 46.9% jump from a year ago. The median price in the Northeast was $384,300, up 17.1% from May 2020.
Existing-home sales in the Midwest rose 1.6% to an annual rate of 1,310,000 in May, a 27.2% increase from a year ago. The median price in the Midwest was $268,500, an 18.1% increase from May 2020.
Existing-home sales in the South declined 0.4%, posting an annual rate of 2,590,000 in May, up 47.2% from the same time one year ago. The median price in the South was $299,400, a 22.6% jump from one year ago.
Existing-home sales in the West fell 4.1%, recording an annual rate of 1,180,000 in May, a 61.6% climb from a year ago. The median price in the West was $505,600, up 24.3% from May 2020.

Consumer Confidence Leaps

Also late in the month, the Conference Board announced that its Consumer Confidence improved in June, following gains in each of the previous four months. The Index now stands at 127.3 (1985=100), up from 120.0 in May.

The Present Situation Index – based on consumers’ assessment of current business and labor market conditions – rose from 148.7 to 157.7.
The Expectations Index – based on consumers’ short-term outlook for income, business, and labor market conditions – improved to 107.0, up from 100.9 last month.

Appraisal of current business conditions improved:

24.5% of consumers said business conditions are “good”, up from 19.9%.
19.5% of consumers claimed business conditions are “bad”, down from 20.6%.

Assessment of the labor market also improved:

54.4% of consumers said jobs are “plentiful”, up from 48.5%.
10.9% of consumers claimed jobs are “hard to get”, down from 11.6%.

Optimism about the short-term business conditions:

33.3% of consumers expect business conditions will improve, up from 31.0%.
25.7% of consumers expect more jobs to be available in the months ahead, down from 27.7%
18.6% of consumers expect their incomes to increase, up from 16.2%.

_{Sources: bls.gov; conference-board.org; nar.realtor; factset.com; msci.com; fidelity.com; nasdaq.com; wsj.com; morningstar.com}