2nd QUARTER 2021 MARKET REVIEW
Thrivent Asset Management Contributors to this report: Steve Lowe, CFA, Chief Investment Strategist; John Groton, Jr., CFA, Director of Administration and Materials & Energy Research; Matthew Finn, CFA, Head of Equity Mutual Funds; and Jeff Branstad, CFA, Senior Investment Product Manager
With the pandemic waning and the economy revving up, stocks continued to set new highs in the 2nd quarter. The S&P 500® Index moved up 2.27% in June and 8.17% in the 2nd quarter. Through the first half of 2021, the index climbed 14.41%.
But the economic resurgence, along with rising consumer sentiment and a strong recovery in the oil market, has triggered a surge in the cost of living. The Consumer Price Index (CPI), which is a key measure of inflation, rose 0.6% in May after rising 0.8% in April, according to the U.S. Bureau of Labor Statistics in a June 10 report. Over the 12-month period through May, the CPI rose 5.0% – the largest 12-month increase since 2008. Excluding food and energy, the CPI rose 3.8% over the 12-month period, the largest one-year increase since 1992.
The increase was super-charged by rising used car prices, which jumped 7.3% in May, accounting for about one-third of the total monthly CPI increase.
While mounting inflation could stall the economic recovery, Federal Reserve Chair Jerome Powell recently told Congress that he believes prices will “stop going up and ultimately start to decline” as the recovery stabilizes.
Powell added: “This reflects, in part, the very low readings from early in the pandemic falling out of the calculation; the pass-through of past increases in oil prices to consumer energy prices; the rebound in spending as the economy continues to reopen; and the exacerbating factor of supply bottlenecks, which have limited how quickly production in some sectors can respond in the near term. As these transitory supply effects abate, inflation is expected to drop back toward our longer-run goal.”
The employment picture continued to brighten in the 2nd quarter, with 850,000 new jobs added in June, although the unemployment rate was little changed, sliding from 6.0% at the end of the 1st quarter to 5.9% at the end of the 2nd quarter, according to the Department of Labor (DOL) employment situation report issued July 2.
The S&P 500 Index was up 2.27% for the month of June, from 4,204.11 at the end of May to 4,297.50 at the June close. The total return of the S&P 500 (including dividends) was 2.33% for the month of June, 8.55% for the 2nd quarter, and 15.25% through the first six months of 2021. (The S&P 500 is a market-cap-weighted index that represents the average performance of a group of 500 large capitalization stocks.)
The NASDAQ Index was up 5.49% for the month, from 13,748.74 at the end of May to 14,503.95 at the June close. For the 2nd quarter, the NASDAQ was up 9.49%, and it was up 12.54% through the first half of 2021. (The NASDAQ – National Association of Securities Dealers Automated Quotations – is an electronic stock exchange with more than 3,300 company listings.)
Retail sales decreased 1.3% from the previous month in May, according to the Department of Commerce retail report issued June 15. However, compared with one year ago – in the early days of the pandemic lockdown – sales were up 28.1%. Total sales for the three-month period of March through May were up 36.2% from the same period a year ago.
Auto sales were down 3.7% for the month in May – but up 34.8% from a year earlier. Building material sales were down 5.9% for the month, but up 10.5% from a year earlier; electronics and appliance stores were down 3.4% for the month but up 91.3% from a year earlier; and department store sales were up 1.6% for the month and up 28.0% from a year earlier. Clothing sales were up 200.3% from a year earlier and up 3.0% from the previous month.
Restaurants and bars continued to benefit from the recovery, with the food services and drinking places category up 1.8% for the month and 70.6% from a year earlier. As consumers stepped up their in-store shopping, non-store retailers (primarily online) dropped for the second straight month, down 0.8%. But sales were still up 7.9% from a year earlier.
Unemployment claims have continued to edge down as businesses reopen and the economy rebounds, according to the DOL. In the week ending June 26, there were a total of 364,000 unemployment claims, which was a decrease of 51,000 from the previous week. The 4-week moving average of 392,750 – which was 6,000 below the previous week's average – marked the lowest level since March 14, 2020 at the start of the pandemic.
The U.S. unemployment rate was little changed in June, edging up from 5.8% to 5.9%, despite the addition of 850,000 new jobs, according to the DOL Employment Situation Report issued July 2. Average hourly earnings increased by $0.10 in June to $30.40.
The Real Estate sector of the S&P 500 was up 13.09% in the 2nd quarter to lead all sectors, followed by Information Technology, up 11.56%, Energy, up 11.30%, and Communication Services, up 10.72%. Through the first six months of 2021, Energy led all sectors, up 45.64%, followed by Financials, up 25.69%, and Real Estate, up 23.30%.
The chart below shows the results of the 11 sectors for the past month, past quarter and year-to-date:
Bond yields dropped in the 2nd quarter after a rapid run-up in the 1st quarter. The yield on 10-year U.S. Treasuries dropped from 1.74% at the end of the 1st quarter to 1.45% at the June close.
Corporate earnings expectations continued to rise in the 2nd quarter, as the economy recovered. The 12-month advanced earnings per aggregate share projections for the S&P 500 moved up 10.59% in the 2nd quarter. Through the first six months of 2021, advanced earnings projections jumped 20.66%.
As earnings projections rose, the forward price-earnings ratio (P/E) of the S&P 500 declined slightly in the 2nd quarter, despite the steady increase in stock prices.
The forward P/E at the end of the 2nd quarter was 21.34 after closing the 1st quarter at 21.88. It was also below the 2020 closing level of 22.46, although it is still well above the 2019 closing level of 18.18 and the 2018 closing level of just 14.40. If the outlook for corporate earnings continues to improve, that could help hold the line on the P/E level.
The forward 12-month earnings yield for the S&P 500, which is the inverse of the P/E, ended the 2nd quarter at 4.70%, which is slightly better than the 4.57% yield at the end of the 1st quarter. The 12-month forward earnings yield can be helpful in comparing equity earnings yields with current bond yields. Although the yield is about 2% lower than it was two years ago, it is still significantly higher than the 1.45% market rate of 10-year U.S. Treasuries.
The Euro was up 0.90% versus the dollar in the 2nd quarter, although it was still down 3.08% versus the dollar through the first half of 2021. The dollar appreciated 0.44% versus the Yen in the 2nd quarter. For the year, the dollar has gained 7.50% versus the Yen. The strength of the dollar this year has been attributed, in part, to the comparatively rapid recovery that the U.S. has made from the pandemic compared with most other countries.
With global travel picking up, oil prices continued to rally in the 2nd quarter, reaching their highest level in more than two years. The price of West Texas Intermediate, a grade of crude oil used as a benchmark in oil pricing, moved up 10.78% in June and 24.19% in the 2nd quarter, from $59.16 at the end of the March to $73.47 at the close of June. Through the first six months of 2021, the price of oil jumped 51.42%.
Gasoline prices have also surged this year, with the average price per gallon rising from $2.31 at the end of 2020 to $3.15 at the close of the 2nd quarter – a 36.43% increase.
Even with the pandemic abating and economic optimism returning, gold prices edged up in the 2nd quarter from $1,715.60 per ounce at the end of the 1st quarter to $1,771.60 at the end of June, a 3.26% gain. However, for the year, gold prices have dropped 6.52% from their 2020 closing price of $1,895.10.
International equities performed well in the 2nd quarter, as businesses began to open up around the world. The MSCI EAFE Index rose 4.37%, from 2,208.32 at the end of the 1st quarter to 2,304.92 at the June close. Through the first six months of 2021, the index was up 7.33%. (The MSCI EAFE tracks developed-economy stocks in Europe, Asia and Australia.)
All information and representations herein are as of 07/07/2021, unless otherwise noted.
The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Thrivent Asset Management, LLC associates. Actual investment decisions made by Thrivent Asset Management, LLC will not necessarily reflect the views expressed. This information should not be considered investment advice or a recommendation of any particular security, strategy or product. Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon, and risk tolerance.
Any indexes shown are unmanaged and do not reflect the typical costs of investing. Investors cannot invest directly in an index.
Past performance is not necessarily indicative of future results.