U.S. stock finished mostly higher last week with the S&P 500 and Dow setting new record highs. The S&P 500 Index closed the week at a level of 4,468, representing a gain of 0.75%, while the Russell Midcap Index moved 0.52% higher. Meanwhile, the Russell 2000 Index, a measure of the Nation’s smallest publicly traded firms, returned -1.06% over the week. International equity performance was mixed as developed and emerging markets returned 1.56% and -0.84%, respectively. Finally, the 10-year U.S. Treasury yield was little changed over the week, closing at 1.29% on Friday.
U.S. Equity markets were able to once again notch record highs last week as investors were tasked with interpreting updates on infrastructure spending, inflation, jobs, and of course, COVID-19 cases. However, amid uncertainty surrounding these topics, investors and markets remain resilient, as we believe they should at this stage of the economic cycle. There has been much talk lately about peak earnings, slowing growth, and if this impressive ascent can continue. In the U.S., while we may be transitioning from early-cycle to a mid-cycle environment with earnings likely to have peaked in the second quarter as the economy normalizes, we remain bullish on the prospect for attractive returns in equity markets through the end of the year.
To help support our view, the graphic below represents S&P 500 monthly performance based on various readings of economic activity levels, represented by the ISM Manufacturing Index. A reading below 50 for the index is typically indicative of a contraction while greater than 50 usually is representative of an expansion. Monthly returns are highest when activity moves from a contraction to expansion and eventually peaks. This may come as no surprise to many investors, however, what may be surprising is that monthly returns remain attractive when economic activity decelerates but remains in expansionary territory, which is where we are today.
While concerns over “peak growth,” signals from the yield curve, the Fed’s next move and the COVID-19 Delta variant may have some investors shakey or on the sidelines, we aim to differentiate relevant data from distracting noise and are positioning portfolios to help take advantage of an expanding economy and subsequent expected market gains. It is important to note that investors can position portfolios to help limit downside risk through diversification while still participating in appreciation potential. For instance, one could tilt more toward defensive areas of the market, ensure portfolios consist of high-quality companies, or even invest in international developed markets that appear to be in the early innings of the economic recovery compared to the U.S.
As always, we encourage investors to work with experienced financial professionals to help build and manage the asset allocations within their portfolios consistent with their objectives, timeframe, and tolerance for risk. Best wishes for the week ahead!
Sources for data in tables: Equity Market and Fixed Income returns are from JP Morgan as of 8/13/21. Rates and Economic Calendar Data from Bloomberg as of 8/13/21. International developed markets measured by the MSCI EAFE Index, emerging markets measured by the MSCI EM Index, U.S. Large Cap defined by the S&P 500. Sector performance is measured using the GICS methodology.
Disclosures: Past performance does not guarantee future results. We have taken this information from sources that we believe to be reliable and accurate. Hennion and Walsh cannot guarantee the accuracy of said information and cannot be held liable. You cannot invest directly in an index. Diversification can help mitigate the risk and volatility in your portfolio but does not ensure a profit or guarantee against a loss.
Diversification can help mitigate the risk and volatility in your portfolio but does not ensure a profit or guarantee against loss.
Investing in commodities is not suitable for all investors. Exposure to the commodities markets may subject an investment to greater share price volatility than an investment in traditional equity or debt securities. Investments in commodities may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity.
Products that invest in commodities may employ more complex strategies which may expose investors to additional risks.
Investing in fixed income securities involves certain risks such as market risk if sold prior to maturity and credit risk especially if investing in high yield bonds, which have lower ratings and are subject to greater volatility. All fixed income investments may be worth less than the original cost upon redemption or maturity. Bond Prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline of the value of your investment.
MSCI- EAFE: The Morgan Stanley Capital International Europe, Australasia and Far East Index, a free float-adjusted market capitalization index that is designed to measure developed-market equity performance, excluding the United States and Canada.
MSCI-Emerging Markets: The Morgan Stanley Capital International Emerging Market Index, is a free float-adjusted market capitalization index that is designed to measure the performance of global emerging markets of about 25 emerging economies.
Russell 3000: The Russell 3000 measures the performance of the 3000 largest US companies based on total market capitalization and represents about 98% of the investible US Equity market.
ML BOFA US Corp Mstr [Merill Lynch US Corporate Master]: The Merrill Lynch Corporate Master Market Index is a statistical composite tracking the performance of the entire US corporate bond market over time.
ML Muni Master [Merill Lynch US Corporate Master]: The Merrill Lynch Municipal Bond Master Index is a broad measure of the municipal fixed income market.
Investors cannot directly purchase any index.
LIBOR, London Interbank Offered Rate, is the rate of interest at which banks offer to lend money to one another in the wholesale money markets in London.
The Dow Jones Industrial Average is an unweighted index of 30 “blue-chip” industrial U.S. stocks.
The S&P Midcap 400 Index is a capitalization-weighted index measuring the performance of the mid-range sector of the U.S. stock market, and represents approximately 7% of the total market value of U.S. equities. Companies in the Index fall between S&P 500 Index and the S&P SmallCap 600 Index in size: between $1-4 billion.
DJ Equity REIT Index represents all publicly traded real estate investment trusts in the Dow Jones U.S. stock universe classified as Equity REITs according to the S&P Dow Jones Indices REIT Industry Classification Hierarchy. These companies are REITs that primarily own and operate income-producing real estate.