July 2021 Monthly Review
July was a positive month - economic growth was solid, initial stages of a compromised infrastructure bill boosted equities, earnings in the US were better than expected and companies boosted dividends and share buybacks helping the S&P to its sixth consecutive monthly gain. U.S. equities continued to be the favored asset class in the US, but the bond market also had strong performance in July.
The S&P notched a 2.38% total return in July, bringing 2021 gain to 17.98%. Since the “covid-lows” of March 2020, the index has been up over 100%. Despite earlier strength in industrials, the gains have been broad-based this year with the Dow Jones Industrial average up 15.31% and the NASDAQ composite up 14.26%.
While July was positive, the rally also felt somewhat cautious as investors digested fears surrounding the coronavirus, inflation sustainability, and questions around Chinese government market intervention. Health care, real estate, and utilities led indices higher as they all returned over 4% in July. Financials were slightly negative as the yield curve flattened and energy was down 8.44% as global demand came into question and OPEC committed to keeping oil supply high.
The most notable concern has been the resurgence of covid-19 as the coronavirus's delta variant spreads. On July 19th as the CDC described the “pandemic of the unvaccinated” Treasury yields fell to levels they had not seen since February. The bell-weather US 10-year Treasury briefly traded at a 1.12% yield on July 20th.
As recent positive economic and inflation data was challenged Treasuries saw their biggest gains in a year. The last few months of positive moves in Treasuries reflect a global move to safety and attractiveness of higher US yields as many countries are in negative yield territory. Sparse summer supply of new corporate bonds had many investors chasing yield. The result brought broad indices close to positive figures for 2021. Municipal bonds underperformed as they remain historically expensive but still rose with treasury prices.
Dovish posturing and inflation messaging from the FOMC meeting remained similar to June’s and generally met market expectations. Some subtleties indicated that tapering was off the table in the near term. One nuance was the retraction of a priority of bond tapering (i.e. MBS first, before Treasury tapering). Markets believe there is a good chance of tapering plan details being released at the annual Jackson Hole FOMC at the end of August. Market consensus is that tapering will begin in December 2021, which would place any chance of short-term rate hikes into late 2022 at the earliest.
Inflation continues to be debated in the United States as the Federal Reserve continues to view increases as a temporary phenomenon, some companies are citing shortages in labor, computer chips, and materials that will not go away soon.
Fixed income strategies saw their fourth consecutive month of positive performance. While the bond market has been overshadowed by lofty equity returns, safe bond allocations have provided portfolio diversification as certain risk markets experience high valuations.
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