Equity Markets Immune to Delta Variant?
MONTHLY MARKET COMMENTARY |
- Equity markets largely shrugged off headline risks in August—the S&P 500 posted its seventh straight monthly gain.
- The Federal Reserve will likely begin tapering its asset purchase program later this year or early in 2022, with additional guidance expected at the upcoming fall meetings.
- A renewed focus on antitrust practices by the Chinese government has been a headwind for many large Chinese technology companies. Uncertainty as to the direction and intensity of future regulation may lead to continued volatility.
August was characterized by the continued spread of the delta variant, extreme weather events across the country and unrest in the Middle East. Yet despite the negative events and headlines, investors were rewarded with higher equity markets.
U.S. stocks, for the most part, led the way as the S&P 500 breached 4,500 for the first time and returned 3% for the month. Supply-demand concerns pushed oil prices down, resulting in energy being the lone S&P 500 sector with a negative return. The U.S. economy remained resilient, despite a more modest uptick in consumer spending compared to prior months, likely attributable to the increase in coronavirus cases. Corporate fundamentals remained favorable, the unemployment rate continued to fall and leading indicators remained strong on a year-over-year basis.
Equity markets abroad were also positive in August, albeit slightly trailing the United States. Emerging markets outperformed their developed counterparts, with the MSCI Emerging Markets Index returning 2.6%, while the MSCI Europe, Australasia and Far East Index posted a 1.8% gain. India was a standout within emerging markets, Brazil declined slightly and index heavyweight China was flat.
Fixed income markets were mixed during August, but bonds as a whole came under pressure as rates generally moved higher. The 10-year U.S. Treasury yield briefly fell below 1.2% early in the month before settling at 1.3%. As a result, the Bloomberg U.S. Aggregate Bond Index returned negative 0.2%. Investors remain committed in their preference for riskier segments of the fixed income market as the search for yield continues. The Bloomberg U.S. Corporate High Yield Bond Index gained 0.5% in August. Markets reacted favorably to Fed Chairman Jerome Powell’s comments that the central bank may begin to taper its bond-buying program later in the year. While nothing official has been outlined yet, we anticipate more specific guidance at one of the upcoming fall meetings and continue to believe interest rate hikes are not an immediate concern.
China: Year of the (wayward) ox
China has certainly made headlines in recent months, and investors have not experienced particularly smooth sailing. Government antitrust investigations and crackdowns on data security, which we discussed in a recent Insight article, have had an impact on many of the Chinese tech giants. China’s negative 12.3% year-to-date return has significantly lagged the broader emerging markets asset class (2.8% year-to-date) as investors remain uncertain as to which industry may be affected next.
While the technology sector has been the primary focus of the Chinese authorities to date, areas such as education are also in the spotlight, with private education undergoing reform—and stock in private tutoring service providers New Oriental and Tal Education Group falling more than 70% since the end of the second quarter. The Chinese government has also signaled a renewed focus on “common prosperity” and social equity. The true impact on the corporate markets remains to be seen, but we have already witnessed two prominent technology companies, Tencent and Pinduoduo, announce they will be donating a large portion of profits to Chinese social programs.
While these actions are noteworthy and create some degree of investor apprehension, there are also positive indications coming out of Beijing. Futures contracts on the China A-shares market are expected to start trading in coming months, and there are signs the China Securities Regulatory Commission is making headway with U.S. regulators on accounting disclosures for Chinese companies—both of which should ultimately support foreign investor demand. While China has a significant influence on the collective fate of emerging markets, we remain committed to the emerging markets asset class, as it presents an attractive potential source of return for portfolios—though we are fully cognizant of the somewhat more volatile nature of the space.
August was wrought with developments around the world that created uncertainty for investors. We are mindful of elevated market valuations and the surge in the delta variant, which has the potential to hinder the pace of the economic recovery, at least temporarily. However, broader economic conditions supportive of additional gains remain largely intact, and the forthcoming rollout of COVID-19 vaccine boosters should help assuage investors’ more immediate concerns.
We remain guardedly optimistic as we head into the fall, and maintain our baseline expectation that thoughtful risk-taking in portfolios will be rewarded. A maturing economic backdrop and developments on the coronavirus front are likely to stoke bouts of volatility as we move toward the end of the year. Maintaining a long-term view and adhering to existing strategic allocations will provide the best opportunity to achieve favorable long-term investment outcomes for portfolios.
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