Another month, another all-time high for the S&P 500, an achievement that has become common place for the index for much of 2021. The benchmark index ended August with a gain of 3.04%. It is now higher by more than 21.5% on the year and trades at 37 times 10-year earnings, more than twice its historical average. Non-U.S. equities also turned in a good showing for August, with the MSCI EAFE index gaining 1.76%, while the MSCI Emerging Markets index advanced by 2.62%, all despite the dollar hitting its intra-year high mid-month.
Fixed income markets did not fare nearly as well, as the yield on the 10-year treasury ticked up by roughly 12 bps during the month. This resulted in a loss of 0.19% for the Barclays Aggregate Bond index and a near identical decline for the broad treasury index. Credit sensitive sectors, however, did not follow suit. Boosted by strong equity markets, both domestically and abroad, U.S. high yield bonds gained 0.51% and were outpaced only by emerging markets local bonds, which advanced by 0.77%.
U.S. growth stocks finally closed the performance gap with value in August, following three consecutive months of strong outperformance. This left the Russell 1000 Growth index higher by 21.08% for 2021 versus a gain of 20.32% for its value counterpart. The story is quite the contrary in small caps. During the month, small value edged out small growth stocks by a margin of less than 100 bps (2.68% vs. 1.82%), but maintain a commanding lead of more than 18.50% on a YTD basis (25.43% vs. 6.92%). This differential can be attributed to a number of factors, which include -- Meme stock holdings in the value index (e.g., Gamestop & AMC), strong performance out of the banking and real estate sectors, and disappointing performance for a number of growth-oriented biotech names.
Non-U.S. market performance bounced back in August, after a disappointing month of underperformance in July. Emerging markets equities, showed the strongest reversal, gaining 2.62% in USD-terms, following a 6.73% decline the month prior. While China was still a detractor on the month, as the country continued to deal with new regulations impacting its technology sector, Indian equities led the index higher, advancing by more than 10% on stronger-than-expected economic data.
Yields on the 10-year treasury ended the month at 1.30%. This was roughly 12 bps higher than where they began August, but well below both the high of 1.74% reached in March and our estimated fair value range of 2.00%-3.00%. It is our expectation, however, that fair value likely lies closer to the lower end of this range than the upper, given our recent inflation scare and the potential over-reaction by the market.
As would be expected, this had a negative impact on most high-quality and interest rate sensitive areas of the bond market, leading to a decline of 0.19% for the benchmark Barclays Aggregate Bond index. High yield corporates were one of the few U.S.-based fixed income sectors to perform well in August, gaining 0.51%. Returns were bolstered by a general decline in equity market volatility and subsequent tightening of credit spreads, which ended the month at just 284 bps, compared to a long-term average of more than 500 bps. Emerging markets local bonds were the top performer during the month, gaining 0.77%, as EM equities regained their footing after a shaky July.
Demand concerns related to COVID-19 led broad-basket commodities to post their first negative monthly return since March (-0.30%). Energy-related commodities were hit hardest, with crude oil declining by nearly 7%, while gasoline lost 2.5%. Despite this short-term weakness, nearly all major commodities are still meaningfully higher on a YTD basis, resulting in a 23.01% total return for the index, which outpaces the S&P 500 by approximately 1.5%.
Closed End Funds
Closed end funds had another strong month, benefiting from a combination of strong equity market returns and positive credit conditions. This resulted in a decline of roughly 80 bps for industry-wide discounts. This positively impacted iCM’s Tactical Income Closed End (TICE) strategy, which continues to hold the majority of its portfolio in attractively-valued closed end funds. During the month, the strategy advanced by more than 1.5% and is now higher by more than 14% YTD. This compares very favorably to its blended asset-weighted benchmark, which is higher by just 7.5% in 2021.
Monthly “Market Flash” is intended solely to report on various investment views held by Integrated Capital Management. Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. We believe the information provided here is reliable, but should not be assumed to be accurate or complete. References to specific securities, asset classes and financial markets are for illustrative purposes only and do not constitute a solicitation, offer or recommendation to purchase or sell a security.
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TICE Blended Index comprised of 32% S&P 500/8% MSCI EAFE/38% Barclays Aggregate Bond/20% Barclays Municipal Bond/2% Cash
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