Perspective :

Aug. 2021 Monthly Capital Markets Perspective

< Back

Lather, rinse, repeat

The first release of second quarter U.S. Gross Domestic Product (GDP) growth came in at 6.5%, according to the Commerce Department. This pace is slightly higher than the 6.3% rate in the first quarter, but nowhere near the consensus of about 9% or the Atlanta Fed’s pre-release GDPNow forecast of 7.4%. Explanations for the miss centered around inventories that are expected to rebound in Q3, and economists were heartened by better-than-expected consumer spending (11.8% vs. 10.5% estimate). The Bloomberg consensus GDP estimate at the end of June for 2023 had already fallen back to 2.3% before this miss. And as a reminder, real GDP[1] growth averaged just 2.3% from the end of the last recession in June of 2009 through calendar year end 2019, just before the pandemic hit. Despite recent continuous quantitative easing (QE) and trillions of dollars of stimulus, the Bloomberg consensus expectation is that we’re going right back to the slow growth environment that we had before. Oh, and seemingly nobody cares. The market is up.

A probable contributing factor to a resumption of “Operation Slow Growth” is the fact that the ratio of births per death in the U.S. inched its way closer to one last year, with 25 states recording more deaths than births, according to the CDC and reported by the Wall Street Journal. But to be fair, that’s a longer-term issue that likely has no material impact on the present. And what we know about the present is that:

  • Manufacturing continues to be on a tear, based on the Markit US Manufacturing PMI.
  • Services are continuing to improve but have cooled a bit presumably due to the Delta variant and lack of labor.
  • Sell-side analysts expect earnings to rise another 10-11% in both 2022 and 2023 according to Refinitiv, seemingly ignoring both the slowing growth environment and the pressures that margins are likely to experience from their current highs, estimated to be 13.1% for the S&P@ 500 in Q2, according to S&P@.

As it is earnings season, hats off to Corporate America. With 69% of companies reporting through August 2nd, S&P reports that 88% beat on both sales and earnings. Earnings are only expected to advance by about 3.4% from the first quarter, but by fully 83% from the second quarter of last year. And that’s on an operating basis, that is, excluding all the non-recurring bad stuff that tends to reoccur about every quarter. On an as-reported basis, which plummeted last year because, well, you know, bad stuff, 2Q earnings are estimated to be up 163% from 2Q20. Exciting times to be sure.


What happened in the markets in July?

  1. Equities: Emerging Market Equities Taken Behind the Woodshed

With the yield on the 10-year ending the month at 1.24%, down 21 basis points (bps) from the prior month, REITs were the relative heroes with the Wilshire U.S. REIT Index advancing by 5.1%. Growth stocks in the U.S. and abroad may have also benefitted from the decline in rates, with the Russell 1000 Growth returning 3.3% (the correlation between FAANGM (Facebook, Amazon, Apple, Netflix, Google (Alphabet), and Microsoft) and long-term Treasuries has been increasing). In addition, MSCI EAFE Small Growth was up 2.2%, and MSCI EAFE Growth gained 1.7%. We believe value did okay, at least in the mid to large cap space, and the Russell 3000 Value added 0.5%. But size, or the lack thereof, was a deterrent for the month, with micro caps (Russell Microcap Index) down 5.5%, the Russell 2000 off by 3.6%, and the S&P 600® losing 2.4%. All of which paled in comparison to the beating that Emerging Markets took, which we suspect is due primarily to the expansion of China’s regulatory crackdown from big tech initially, to media, food delivery and education related companies. The MSCI Emerging Market Index fell by 6.7% in U.S. dollar terms (the bloodletting was worse in local currency terms).


  1. Bonds: Treasuries, the Kale of a Balanced Investment Diet

You may not like them, but Treasuries can sure pack a financially nutritious punch that can add to a balanced portfolio. Long-term Treasuries gained 3.8% for the month (Bloomberg Barclays US Treasury 20+), outpacing every major and minor asset class that we monitor, with the exception of REITs. And there were other bond market winners besides long duration: investment grade credit (Bloomberg Barclays US Corp Bond) and municipals (Bloomberg Barclays Municipal Bond Index) had good months, being up 1.4% and 0.8% respectively. In addition, high yield (Bloomberg Barclays U.S. Corp High Yield) and emerging market debt (Bloomberg Barclays Emerging Markets USD) were also in positive territory.


  1. Commodities: Gold Gets its Mojo Back

Spot gold climbed by 2.6%, rebounding from a rough June when it lost over 7%. Other precious metals weren’t as lucky, as silver futures slipped 2.5% and platinum futures fell by 2.3%. More broadly, commodities were up, with the Bloomberg Commodity Index advancing by 1.8%, helped by coffee (+12.4%), tin (+11.6%) and natural gas (+8.0%). If you find it odd that inflation-hating Treasuries and inflation-loving gold (or so the shaky story goes), were both up sharply, you’re not alone.


How are Frontier strategies positioned?

Allocation Changes

July was a sleepy month in terms of allocation changes. Our models suggested slight adjustments to U.S. equities – adding to large caps and reducing small caps – marginally reducing commodities, and adding slightly to emerging markets in the more aggressive and/or unconstrained strategies. In practice, most of the allocation changes were not sufficiently additive to justify implementation, and within the Globally Diversified set of strategies, we only traded Long Term Growth on the qualified side and Global Opportunities on the taxable side.


Performance Attribution

For the month, our strategies exhibited mixed performance, which makes it difficult to generalize about the outcomes and reasons thereof. With that said, large allocations to small caps in the more aggressive strategies, coupled with meaningful exposure to emerging markets, while being a bit underweight to U.S. large caps and REITs, all contributed to lower returns. Exposure to long-term Treasuries was beneficial. And on the more conservative side of our strategy lineup, overweight exposure to Treasuries and high-quality bonds was additive and offset some of the same relative equity positioning issues described above.

Download the Commentary

[1] Real gross domestic product is the inflation adjusted value of the goods and services produced by labor and property located in the United States.

Past performance is no guarantee of future returns. Performance discussed represents total returns that include income, realized and unrealized gains and losses, but gross of advisory fees. Nothing presented herein is or is intended to constitute investment advice or recommendations to buy or sell any types of securities and no investment decision should be made based solely on information provided herein. There is a risk of loss from an investment in securities, including the risk of loss of principal. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for an s investor’s financial situation or risk tolerance. Diversification and asset allocation do not ensure a profit or protect against a loss. All performance results should be considered in light of the market and economic conditions that prevailed at the time those results were generated. Before investing, consider investment objectives, risks, fees and expenses. Frontier may modify its process, opinions and assumptions at any time without notice as data is analyzed.
Information provided herein reflects Frontier’s views as of the date of this newsletter and can change at any time without notice. Frontier obtained some of the information provided herein from third party sources believed to be reliable, but it is not guaranteed, and Frontier does not warrant or guarantee the accuracy or completeness of such information. The use of such sources does not constitute an endorsement. Frontier’s use of external articles should in no way be considered a validation. The views and opinions of these authors are theirs alone. Reader accesses the links or websites at their own risk. Frontier is not responsible for any adverse outcomes from references provided and cannot guarantee their safety. Frontier does not have a position on the contents of these articles. Frontier does not have an affiliation with any author, company or security noted within. Frontier reserves the right to remove these links at any time without notice.
Exclusive reliance on the information herein is not advised. This information is not intended as a recommendation to invest in any particular asset class or strategy or as a promise of future performance. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Assumptions, opinions and estimates are provided for illustrative purposes only. They should not be relied upon as recommendations to buy or sell any securities, commodities, treasuries or financial instruments of any kind. This material has been prepared for information purposes only and is not intended to provide, and should not be relied on for, accounting, legal, investment or tax advice. Frontier does not directly use economic data as a part of its investment process.
Any forward-looking statements or forecasts are based on assumptions and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. The estimates, including expected returns and downside risk, throughout are calculated monthly by Frontier and will change from month to month depending upon factors, including market movements, over which Frontier has no control. They are only one factor among many considered in Frontier’s investment process and are provided solely to offer insight into Frontier’s current views on long-term future asset class returns. They are not intended as guarantees of future returns and should not be relied upon in making investment decisions.
Hypothetical expected returns have certain limitations, are discussed for illustrative purposes only and it should not be assumed that actual results will match the hypothetical expected returns referred to. Unlike actual performance, hypothetical expected returns do not represent actual trading and since trades have not been executed, the results shown may have under or overcompensated for the impact, if any, of certain unforeseen market factors. Hypothetical expected returns, whether backtested or forecasted, have many inherent limitations and no representation is being made that any account will or is likely to achieve the results expected. In fact, there are frequently material differences between hypothetical expected results and actual results achieved. One of the limitations of hypothetical expected results in that they do not take into account that material market factors may have impacted the adviser’s decision-making process if the firm were actually trading clients’ accounts. Also, when calculating the hypothetical expected returns, the adviser has the ability to change certain assumptions and criteria in order to reflect better returns. There are numerous other factors related to the markets in general or to the implementation of any specific investment strategy that cannot be fully accounted for in the preparation of hypothetical expected results, all of which can adversely affect actual trading and performance. Importantly, it should not be assumed that investors who actually invest in this strategy will have positive returns or returns that equal either the hypothetical expected results expected. In addition, performance can, and does, vary between individuals.
In reviewing the performance information presented here, we recommend that you consider both the returns generated and the level of risk that was assumed in generating those results. We believe that performance information cannot be properly assessed without understanding the amount of risk that was taken in delivering that performance.
Nominal GDP measures a country’s gross domestic product using current prices, without adjusting for inflation. Contrast this with real GDP, which measures a country’s economic output adjusted for the impact of inflation.
Real Return – The annual percentage return realized on an investment, which is adjusted for changes in prices due to inflation or other external factors
Frontier provides model strategies to various investment advisory firms and does not manage those models on a discretionary basis. The performance and holdings of model strategies may vary from strategies managed by Frontier.
© Morningstar 2021. All rights reserved. Use of this content requires expert knowledge. It is to be used by specialist institutions only. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied, adapted or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information, except where such damages or losses cannot be limited or excluded by law in your jurisdiction. Past financial performance is no guarantee of future results.
It is generally not possible to invest directly in an index. Exposure to an asset class or trading strategy or other category represented by an index is only available through third party investable instruments (if any) based on that index.
Frontier’s ADV Brochure and Form CRS are available at no charge by request at or 307.673.5675 and is available on our website
Wilshire US REIT
Measures U.S. publicly-traded real estate investment trusts and is a subset of the Wilshire US Real Estate Securities IndexSM (Wilshire US RESI)
S&P 600
Represents US large company stocks. It is a market-value-weighted index of 600 stocks that are traded on the NYSE, AMEX, and NASDAQ
An equity index which captures large and mid cap representation across 21 Developed Markets countries
around the world, excluding the U.S. and Canada
MSCI EAFE Small Growth
An equity index which captures small cap representation across Developed Markets countries* around the world, excluding the US and Canada
An equity index which captures large and mid cap securities exhibiting overall growth style characteristics across Developed Markets countries* around the world, excluding the US and Canada
MSCI Emerging Markets
An Index that captures large and mid cap representation across 27 Emerging Markets (EM) countries
Russell 1000 Growth
Measures the performance of the large-cap growth segment of the U.S. equity universe
Russell Microcap
Measures the performance of the microcap segment of the U.S. equity market
Russell 2000
Measures the performance of the small-cap segment of the U.S. equity universe.
Bloomberg Commodity
This is a broadly diversified index that allows investors to track commodity futures through a single, simple measure. The DJ-UBSCISM is composed of futures contracts on physical commodities
Bloomberg Barclays U.S. Treasury 20+ Year
Measures US dollar-denominated, fixed-rate, nominal debt issued by the US Treasury with 20+ years to maturity
Bloomberg Barclays U.S. Treasury US TIPS
Represents inflation-protected securities issued by the U.S. Treasury. TIPS are indexed to the non-seasonally adjusted Consumer Price Index for All Urban Consumers
Bloomberg Barclays U.S. Corporate
Measures the investment grade, fixed-rate, taxable corporate bond market
Bloomberg Barclays U.S. Corporate High Yield
Measures the USD-denominated, high yield, fixed-rate corporate bond market
Bloomberg Barclays Municipal Bond Index
A market-value-weighted index for the long-term tax-exempt bond market
Bloomberg Barclays Emerging Markets USD
A flagship hard currency Emerging Markets debt benchmark that includes USD-denominated debt from sovereign, quasi-sovereign, and corporate EM issuers.

Related Content