Global stocks and bonds advanced in the second quarter as the economic recovery gathered steam. The S&P 500® Index climbed to a new record high with a solid 8.55% gain amid lower volatility during the period. Since the market bottom on March 23, 2020, the S&P 500 has now gained over 96%. Risk appetite was strong as the COVID-19 vaccine paved the way for a continued return to normalcy, as more than 50% of Americans were vaccinated, and governments continued to pump massive fiscal and monetary stimulus into the economy. Businesses and consumers contended with disrupted supply chains and rising prices on goods such as lumber and gasoline, and outbreaks of new COVID variants kept the world on edge.
Investors focused on the U.S. Federal Reserve’s (the Fed’s) policy response to signs of rising inflation and eventual timing of rate hikes and tapering of its monthly asset purchase program. The Core CPI Index rose 3.8% on a seasonally adjusted year-over-year basis in May, its highest reading in nearly 30 years, elevating worries that the economy may overshoot. Drivers also saw rising prices at the pump, where the national average gasoline price rose to $2.97/gallon. A shortage of semiconductor chips caused major disruption for the auto industry and other electronics manufacturers. Auto manufacturers struggled to keep pace with a resurgence in demand and the average price of a used car raced past $25,000. The Fed kept the federal funds rate anchored near zero and tried to allay concerns about inflation. In his press conference remarks in June, FOMC Chair Powell said “The underlying forces around the globe that have created those dynamics are intact, and those are aging population, low productivity, globalization, all of those things that, that we think have, have, you know, really held down inflation. All that’s out there still.” Still, the Fed’s future projections for interest rates (the “dot plot”) moved higher, with two rate hikes expected by the end of 2023, a forecast some see as the Fed’s acknowledgement of the need for nearer-term policy action.
In the labor market, the pace of hiring accelerated as employers hired 850,000 new workers in June. There is still progress to be made, however, with a 5.9% unemployment rate and an economy still short nearly 7 million jobs compared to pre-pandemic levels. U.S. GDP grew at a solid 6.4% clip during the first quarter, helped by the economic reopening and government stimulus. ISM PMI reports on the service and manufacturing sectors decelerated from the first quarter to the second quarter, but continued to show robust economic expansion. The ISM Manufacturing Index slowed from 64.7 to 60.6, and the ISM Non-Manufacturing Index similarly registered a decline from 63.7 to 60.1 (a reading above 50 indicates economic expansion while a reading below 50 indicates contraction).
Equity returns were broadly positive across most market segments and regions during the quarter on the heels of rebounding corporate earnings. According to Factset, second quarter earnings for S&P 500 Index companies are estimated to grow 63.6%, the strongest year-over-year growth since the fourth quarter of 2009. Stocks gained as investors rationalized the S&P 500 forward price-earnings ratio of 21.4x, which remains well above the 10-year average of 16.1x. All sectors had positive returns with the exception of utilities, which dropped -0.41%. The market was led by real estate, which gained 13.09%, followed closely by information technology and energy with returns of 11.56% and 11.30%, respectively. The rally in U.S. value stocks paused as the Russell 1000® Growth Index (+11.93%) outperformed the Russell 1000® Value Index (+5.51%). Small caps lagged large caps with the 4.29% return for the Russell 2000® Index, but they are still ahead on a year-to-date basis with a robust 17.54% return. “Meme stocks” also continued to garner headlines as AMC Entertainment (AMC) rocketed higher by 455%. The gain in AMC alone contributed to more than a quarter of the Russell 2000® Value Index’s 4.56% total return.
Outside the U.S., foreign developed equities lagged the U.S. with a 5.17% return for the MSCI EAFE Index. Emerging markets paced foreign developed markets with a 5.05% return for the MSCI Emerging Markets Index. Unlike the U.S., value stocks continued to rally in emerging markets as global economic growth and rising commodity prices drove a cyclical rebound in markets such as Brazil and Russia. After a strong 2020, China has been a notable laggard this year, returning only 1.83% on a year-to-date basis, as its market has been impacted in part by increasing regulatory reform targeting the technology sector.
Interest rates fell and the yield curve flattened as the bond market reflected less concern about rising inflation. The 10-year U.S. Treasury yield fell from its post-pandemic high of 1.74% to 1.45% at the end the second quarter. The Bloomberg Barclays U.S. Aggregate Bond Index, a broad measure of the investment grade bond market, returned 1.83%. This followed the first quarter, when the Index fell -3.37% (the worst on record). Healthy demand for tax-free income helped drive a 1.42% gain of the Bloomberg Barclays Municipal Bond Index. Agency mortgage-back securities (MBS) lagged the broader market with 0.33% return. Investment grade corporate bonds outperformed other bond sectors with a 3.55% return for the Bloomberg Barclays U.S. Corporate Bond Index. Investment grade credit spreads were little changed while higher-yield spreads continued to tighten, and the Bloomberg Barclays High Yield Bond Index returned 2.74%. Foreign bonds rose 0.92% as measured by Bloomberg Barclays Global Aggregate ex USD Index.
1 Factset, Dept. of Labor
2 Factset, Dept. of Labor
3 J.D. Power
4 Factset, Dept. of Labor
5 Bureau of Economic Analysis 6 Factset, ISM
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Please note that all performance data and comments are for the period from January 1, 2021 through March 31, 2021. Any sectors, industries, or securities discussed should not be perceived as investment recommendations. The views expressed represent the opinions of AMG Funds and are not intended as a forecast or guarantee of future results. The information and opinions contained herein are current as of December 31, 2020 and are subject to change without notice. Information has been obtained from sources believed to be reliable, but its accuracy, completeness, and interpretation are not guaranteed.
The Russell 1000® Index measures the performance of approximately 1,000 of the largest securities based on a combination of their market cap and current index membership. The Russell 1000® represents approximately 92% of the U.S. market.
The Russell 1000® Value Index is a large-cap value index measuring the performance of the largest 1,000 U.S. incorporated companies with lower price-to-book ratios and lower forecasted growth values.
The Russell 1000® Growth Index is a market capitalization weighted index that measures the performance of those Russell 1000® companies with higher price-to-book ratios and higher forecasted growth values.
The Russell 2000® Index is composed of the 2000 smallest stocks in the Russell 3000® Index and is widely regarded in the industry as the premier measure of small-cap stock performance.
The S&P 500 Index is a capitalization-weighted index of 500 stocks. The S&P 500 Index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
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The MSCI World ex USA Index captures large and mid cap representation across 22 of 23 Developed Markets (DM) countries excluding the United States.
U.S. Long Government Bond Index tracks the market for U.S. dollar-denominated, fixed-rate, nominal U.S. Treasuries and U.S. agency debentures
The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets.
The Bloomberg Barclays U.S. Corporate High Yield Bond Index is a total return performance benchmark for USD-denominated, high yield, fixed-rate corporate bonds having a maximum quality rating of Ba1/BB+/BB+ or below, as determined by the middle of the Moody’s, Fitch, and S&P ratings.
The Bloomberg Barclays U.S. Municipal Index covers the USD-denominated long-term tax exempt bond market. The index has four main sectors: state and local general obligation bonds, revenue bonds, insured bonds and prerefunded bonds.
The Bloomberg Barclays U.S. Aggregate Bond Index is an index of the U.S. investment-grade fixed-rate bond market, including both government and corporate bonds.
The Bloomberg Barclays U.S. Corporate Bond Index is an unmanaged index representative of publicly issued, SEC-registered U.S. corporate and specified foreign debentures and secured notes.
The Bloomberg Barclays Global Aggregate ex USD Index is a measure of investment grade debt from 24 local currency markets. This multi-currency benchmark includes treasury, government-related, corporate and securitized fixed-rate bonds from both developed and emerging markets issuers. Bonds issued in USD are excluded.
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