Markets Defy Viral Gloom, Maintaining Ascent

Market Overview

August was devoid of any summer lull, as market themes observed year-to-date remained constant. To commence the month, a robust nonfarm payrolls release revealed that the labor market continued to make strides towards the Fed’s “substantial further progress” criteria for tapering asset purchases. To this extent, total nonfarm payrolls expanded by 943,000 in July, above consensus forecasts for 845,000. In concert, the unemployment rate tumbled to 5.4% from 5.9%, below estimates for 5.7%, as industries that were beaten down the most by the pandemic were the leaders in net hiring. The labor market is admittedly far from being “out of the woods” as there is a 5.7 million shortfall in total payroll employment compared to February 2020 levels. As monthly employment releases remain very choppy, directional labor trends appear to be on the right track as the economy continues to recover. This reality ultimately underscored Fed Chairman Powell’s Jackson Hole speech, which indicated that if the labor market continues to improve it would be appropriate to reduce the Fed’s pandemic related asset purchase program (i.e., to taper) by the end of this year. There was an element of market appeasement derived as Powell drew a distinct line between tapering and any potential future rate hikes which are not actively being considered even as inflation concerns have yet to dissipate.

The major overhang, unsurprisingly, continues to be COVID-19 as the well-publicized Delta variant pervades across the US. As its potential drag on the labor market’s recovery remains in question, US businesses have begun to delay their return-to-office plans and issue vaccine mandates as the more transmissible variant has led to a surge in both cases and hospital admissions in recent weeks, primarily among the unvaccinated. High frequency data suggests an adverse effect on certain industries, with the number of travelers passing through US airports rolling over during the month. Having previously recovered to approach pre pandemic norms, US TSA Checkpoint metricsstand more than 20% below their level of two years ago, revealing the cooling effect on travel demand. What remains clear is that the evolution of COVID-19 and any related variant(s) will continue to cast a shadow over the ongoing recovery for the US and global economy.

Asset Performance:

Markets continued their upward march through the month of August, with broad-based gains witnessed across US equity indices as well as international benchmarks. The S&P 500 posted a gain of 3% for the month and has climbed above 20% year-to-date. While mega-caps led, mid and small-caps also posted gains, with the S&P MidCap 400 and the S&P SmallCap 600 both up 2%. Providing fuel to the market’s rise was a robust Q2 earnings season, which was largely been a repeat of Q1, with record beat rates coupled with upward revisions. According to Yardeni Research, the uptick in revisions has placed forward earnings per share for the S&P 500 at a record $213, which is a sharp “V-shaped” rebound following last year’s collapse in forward earnings estimates.

Key US Index ReturnsYTD ’21August ’21
S&P 500+21.6%+3.0%
Dow Jones Industrial Average+17.0%+1.5%
Relevant Fixed Income YieldsYE 2020August ’21
US 10-Year Treasury Note0.92%1.3%
Investment Grade Corp. (C0A0)1.8%2.0%
High Yield Corp. (H0A0)4.2%4.0%

Source: Factset as of 09/01/21

Fixed income performance was mostly negative for the month, particularly for debt securities carrying greater interest rate sensitivity or duration. As long-term interest rates nudged higher during August, the limited yield in most high quality fixed income assets provided minimal offset to the erosion in price. Specifically, the broad US bond market, as defined by the Bloomberg US Aggregate Index, marginally declined by 0.19% in August. We reiterate the bond market’s unprecedented state of all-time low yields relative to historically high duration (principal’s sensitivity to interest rate changes), which is providing minimal buffer in the instance where interest rates oscillate higher. Separately, following the sizable “bull flattening” – when long-term rates decline faster than short-term rates – which occurred in July (July ’21 Commentary), the US yield curve slightly steepened for the month.

Closing Thoughts

Until tapering actually begins, the Fed is committed to purchase $120 billion per month in the bond market, as it has been doing since December of last year. As we are “rounding the corner” of peak liquidity, we remind our readers that tapering itself isn’t necessarily negative for risk assets, as it has been well telegraphed and overall liquidity remains plentiful. The 2013-2014 taper is a useful, but imperfect, analog for the likely upcoming taper. Even in 2013, a significant rise in real yields did not undermine US equities. Yet as real rates are marooned at levels far lower than ever seen before, we continue to be vigilant on actionable valuation gaps as opportunities present themselves in an ever-evolving landscape.

Warm regards,

Ash Heatwole, CFA

Portfolio Manager, Associate Director of Wealth Management

Stocks offer long-term growth potential but may fluctuate more and provide less current income than other investments. An investment in the stock market should be made with an understanding of the risks associated with common stocks, including market fluctuations. Stock dividends are not guaranteed. Investments primarily concentrated in one sector may be more volatile than those that diversify across many industry sectors and companies. The technology industry can be significantly affected by obsolescence, short product cycles, falling prices and profits, and competition from new market participants. Global/International investing involves risks not typically associated with U.S. investing, including currency fluctuations, political instability, uncertain economic conditions, different accounting standards, and other risks not associated with domestic investments. Investments in emerging markets may be subject to additional volatility. Stocks of small and mid-cap companies may also be subject to greater risk than that of larger companies because they may lack the management expertise, financial resources, product diversification and competitive strengths to endure adverse economic conditions.
The value of fixed income securities will fluctuate with changes in interest rates, prepayment payment rates, exercise of call provisions, changes in the issuer’s credit ratings, market conditions, and other variables such that they may be worth more or less than original cost if sold prior to maturity. There is also a risk that the issuer will be unable to make principal and/or interest payments. Although treasuries are considered free from credit risk they are subject to other types or risks. These risks include interest rate risk, which may cause the underlying value of the bond to fluctuate, and deflation risk, which may cause the principal to decline and treasury securities to underperform traditional securities. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Past performance is not indicative of future results and there is no assurance that any forecasts/targets mentioned in this report will be attained. The indices have been provided for information/comparison purposes only. Individual investors cannot directly invest in an index.
Ashley Heatwole, Chartered Financial Analyst


Associate Director of Wealth Management, Portfolio Manager