United States

Markets Moved Higher Despite Peak Concerns


Key Observations
  • Many broad market indexes posted positive returns for the month with some U.S. indexes hitting all-time highs.
  • However, concerns over peak growth in the economy and corporate earnings led to a continued rotation out of the ‘reflation trade’ areas of the market.
  • Shifts in investor sentiment may also be due to rising COVID-19 case counts as the delta variant takes hold.

Market Recap

July was, on balance, a good month for investors. Many broad market indexes across equity and fixed income posted positive returns. The S&P 500, Dow Jones Industrial Average, and NASDAQ Composite each hit an all-time high during the month. However, we continued to see a rotation out of market segments expected to benefit most from the reopening of the economy due to the proliferation of the COVID-19 delta variant, as well as concerns that this quarter could mark a peak in corporate earnings growth. As a result, growth stocks outperformed their value counterparts by 2.5 percent1, large caps outperformed small caps by 5.7 percent2, and the Energy sector (which had been leading all other U.S. sectors in 2021) snapped an eight-month winning streak. In fixed income, the yield on the 10-year U.S. Treasury note (historically a safe-haven asset) fell for a fourth straight month to levels last seen in February, reflecting reduced economic optimism.

Delta Deluge

The delta variant, which was first discovered late last year in India, has become the most common source of new COVID-19 cases globally and dominated headlines in July. According to Yale Medicine, the delta variant is 50 percent more contagious than the original alpha variant that previously swept across the world3. Greater transmission rates have stoked investor fears of a slower pace to which society returns to ‘normal.’

Case count and hospitalizations also rose, prompting many local governments to take additional actions to slow the spread and reduce the potential need for more drastic measures. In the short-term, markets may be particularly sensitive to this news given the challenges first encountered in March of 2020 and the high expectations for business and the economy in a post-COVID world.

U.S. Case Count and Hospital Admissions

Market Outlook

While investors should certainly remain attentive to recent trends in COVID-19, we note that the intersection of epidemiology and market prognostication should be an exercise filled with humility. As is the case with most manners of forecasting, the variables at play make short-term predictions very difficult. COVID-19 trends are among the most important for investors to monitor given their widespread impact, though we’ll also be monitoring others. Among them is central bank policy, particularly in the U.S., which may play an even more important role in the months ahead as the Federal Reserve looks to taper its $120 billion-per-month in bond purchases. Fiscal policy is another factor to watch as Congress debates a roughly $1 trillion U.S. infrastructure spending package that is being complicated by a separate reconciliation bill focused on Democratic priorities that includes higher corporate and capital gains tax rates (which are more important to the market than spending).

In response to further COVID-19-related disruptions in the future, along with potential shifts in monetary and fiscal policy, portfolios should be constructed with resiliency. With markets hitting recent highs, investors that have not re-evaluated their risk tolerance and objectives since the downturn in March 2020 may find it to be an opportune time to do so.


1 Russel 1000 Growth Total Return vs Russell 1000 Value Total Return

2 Russell 1000 Total Return vs Russell 2000 Total Return

3 https://www.yalemedicine.org/news/5-things-to-know-delta-variant-covid

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