Happy Monday! Hope you had a nice weekend and have plans for a great 4th of July. It was another fun weekend in Omaha, including some entertaining College World Series games.
Markets Update
The S&P 500 ended last week at a record high, up nearly 3% for the week. It was the best week for the market since February. With only a few days left in June, it looks like we’ll have another good month and another great quarter for the stock market.
Once again, we saw large gains in the energy sector, up nearly another 7% last week, now crossing the 50% threshold YTD, and up over 55% over the last 12 months. That helped Value outperform Growth last week.
This week is likely to be fairly quiet given the upcoming holiday, but don’t be surprised to see some selling into quarter-end as some institutional investors rebalance out of outperforming equities into non-equities.
In other good news, the Fed announced its findings of its annual stress tests on big banks and concluded that capital requirements remain at healthy enough levels to handle a “severe recession.” Under this year’s stress test scenario, the 23 banks tested retained capital levels of more than double the minimum requirements. Market bears might cite concerns over current market valuations and investor expectations, but they can’t cite financial stress in the system as was the case leading up to past bear markets.
That said, with the discovery of possible new Coronavirus variants, coupled with various Fed concerns about the economy, continue to expect to see short-term rates remain at near-zero levels until 2022 or even 2023. Longer-term Treasury yields, however, did rise last week. For instance, 10-year Treasuries moved from 1.45% to 1.54% last week.
Deeper Dive
The largest concern to many investors remains the possibility of inflation. Last Friday, the monthly Personal Consumption Expenditures (PCE) showed a 3.9% increase since last May. This was the largest 12-month increase in nearly 13 years. While the PCE and CPI are both displaying reasonable concerns over inflation, the overall and core figures have only risen about 2.2% on an annual basis since May 2019, keeping us close to in line with the Fed’s 2% target when looking back further than 12 months.
Crypto saw yet another volatile week, with Bitcoin now sitting at its mid-January levels after bouncing off a 2021 low of just below $29k on Tuesday. Ethereum hit its lowest level since the end of March. Elon Musk and Jack Dorsey agreed to talk about bitcoin at an event in July. These two industry legends will speak together at a conference on July 21, called “The B Word,” which will discuss and encourage companies and institutional investors to adopt Bitcoin. Bitcoin is opening the week just below $35k.
Upcoming this week, look out for the Case-Shiller Home Price Index Composite on Tuesday and the June employment levels on Friday. The latter number ranks as arguably the most important data point on a monthly basis. Current expectations are for nonfarm payrolls to have increased by 638k last month.
In terms of stock market outlook, the future still looks bright, but it appears as advisors we may need to start helping ratchet down investor expectations. In a recent survey by Natixis of U.S. individual investors, the current expectation is that the stock market will return 17.5% after inflation. Financial professionals expect less than 7%/year. For a frame of reference, the U.S. market has produced a long-term return of about 10% before inflation. In sum, financial advisors need to start managing expectations to make sure investors have good experiences moving forward.
It is indeed a good time to be an asset manager though. According to Goldman Sachs U.S. equity fund inflows are on pace for the strongest 1H since at least 2007. $170 billion has flowed into U.S. equity ETFs and mutual funds so far in 2021, partially reversing the 2020 outflow of $251 billion. Consistent with the broader Value rotation in the market, $76 billion has flowed into Value funds while Growth funds experienced outflows of $24 billion.
Also according to Goldman Sachs, investor equity positioning is extremely elevated relative to history. The Fed’s first quarter Financial Accounts (Z.1) release revealed that households, foreign investors, mutual funds and pension funds – categories that collectively own 91% of the equity market – have an aggregate 49% allocation to equities. This ranks in the 96th percentile since 1990. GIR forecasts households will be net buyers of $400 billion in equities in 2021 driven by the buildup of cash in money market funds (a record $5.5 trillion of cash is sitting on the sidelines), anemic credit yields and a rebound in retail trading activity.
ETFs continue to gain global market share. A Bloomberg article points out that the European ETF market is about to cross over $1.5 trillion in assets. The first $500 billion took 16 years, the second $500 billion took three years, the next $500 billion is going to take roughly 18 months.
Though passively-managed funds still get most of the industry’s net flows, actively-managed funds are definitely back on the upswing. In fact, each month this year the net flows for actively-managed funds has exceeded its 25-year average for that respective month.* We expect this trend to continue.
Resources
For fans of high-quality stock portfolios (featuring high profitability like return-on-equity and strong balanced sheets), according to BlackRock “quality” stocks haven't been this cheap in more than 20 years.
This week’s upcoming episode of Orion’s Weighing Machine will feature Schwab’s Head of Multi-Asset Solutions, Jake Gilliam, to discuss asset allocation.
Speaking of resources, BNYMellon/Orion produced a recent video called “The Future is Fiduciary: Independent Advisors The Evolution Of Investment Advice.” It’s a 23-minute video, and includes some solid information.
For more resources on the economy and markets, including partner content, please review the Orion Portfolio Solutions Financial Advisor Success Hub.
Hat tip to Orion Portfolio Solutions analyst Ben Vaske for helping me with this week’s Bullets. Expect to see a lot more of Ben’s name moving forward!
As always, please let me know if you have any feedback or questions. You can reach me at rusty@orion.com.
Have a great week!
*Morningstar Direct, as of 6/28/21
1917-OPS-6/28/2021
The CFA is a globally respected, graduate-level investment credential established in 1962 and awarded by CFA Institute — the largest global association of investment professionals. To learn more about the CFA charter, visit www.cfainstitute.org.
The CMT Program demonstrates mastery of a core body of knowledge of investment risk in portfolio management. The Chartered Market Technician® (CMT) designation marks the highest education within the discipline and is the preeminent designation for practitioners of technical analysis worldwide. To learn more about the CMT, visit https://cmtassociation.org/.