Perspective : Sept. 2021 Monthly Capital Markets Perspective

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Market records fall as economic activity slows

The U.S. Bureau of Labor Statistics’ jobs report that landed just after month end indicated a disappointing increase in total nonfarm employment of just 235,000 in August, well below the market’s hoped for estimate of around 730,000. Nevertheless, the unemployment rate did decline by 0.2% to 5.2%, while the participation rate remained stalled at 61.7%.

 

That jobs report may very well alter the Fed’s expected tapering timeline, which, coming out of the virtual Jackson Hole meeting the week prior, was expected to begin by year end. In his comments, Chairman Powell reiterated the position that inflationary pressures are transitory, as they are limited to sectors most affected by the pandemic. He also mentioned that the longer-term pattern of low inflation due to technological advancement, demographics, globalization, and the “…commitment of central banks to maintain price stability”, is likely to resume. Further, the market interpreted Powell’s comments to mean that inflation would be allowed to run a bit hot and that actual rate hikes would be on hold for quite some time. His comments were well received.

 

With the beginning of September comes the return to the classroom for most school-age children and the end of Federal emergency unemployment benefits for millions of people. Both events are expected to attenuate the jobless situation, which companies of all sizes, but especially smaller, service-based firms appear eager to welcome. There are still about 6 million fewer people employed today compared to February of 2020, according to the U.S. Bureau of Labor Statistics, so getting those people back to work is a priority to keep the economy humming. Overall economic activity has been slowing, as indicated by Citigroup’s Economic Surprise Index, which recently hit its lowest level in over a year.

 

What happened in the markets in August?

  1. Equities: Skipping Along

The S&P 500® logged 12 new closing highs during its seventh straight monthly advance, on its way to a 3% gain, but failed to keep up with the tech darlings that populate the NASDAQ 100 (+4.3%). Growth stocks in general dominated, although financials (+5.1%) were the best performing sector in the S&P 1500, and the smallest of the small also did quite well, as the Russell Micro Cap Index advanced by 3.6%. Energy stocks trailed all other sectors in the U.S., posting a return of -1.9%. International small caps (MSCI EAFE Small Cap Index) also performed admirably, generating a gain of 2.9%, and the MSCI Emerging Markets Index rebounded from last month’s plunge, ending higher by 2.6%. All major broad market indices were nicely positive for the month, with MSCI EAFE Value picking up the rear with a gain of 1.1%. Overall, the U.S. dollar hurt returns on international investments, subtracting about 50 basis points (bps) from EAFE’s local currency returns.

  1. Bonds: Limping Along

While the yield on the 10-year didn’t move by a large amount (+6 bps), bonds of all types were in the red for the month, apart from the low-quality sectors – leveraged loans, up 59 bps (S&P/LSTA U.S. Leveraged Loan 100 Index) and high yield, advancing by 0.51% (Bloomberg U.S. Corporate High Yield). Munis came in at the bottom of all broad sectors, with the Bloomberg Municipal Bond Index losing 0.37%. The Bloomberg U.S. Corporate Index was down 0.3%, long-term Treasuries (Bloomberg US Treasury 20+)) were off by 21 bps, and the Bloomberg U.S. Aggregate Bond Index posted a 0.19% decline.

  1. Commodities: Decidedly Undecided

The Bloomberg Commodity Index was off by 0.3% for the month, as individual commodities within the same sectors ran in opposite directions on fundamental differences. The energy complex saw natural gas futures advance by almost 11% as WTI crude fell by approximately 7%. Ditto agriculture, with sugar rising by about 11% and soybean oil retreating by 6.9%. Industrial metals witnessed the same bifurcation, with aluminum up by almost 5% and lead down by 5%.

 

How are Frontier strategies positioned?

Allocation Changes

At the asset allocation level, there were essentially no material changes from July to August. Our models gravitated slightly toward managed futures within the more conservative strategies, but otherwise maintained existing exposures. A few trades were made to better shape the risk exposures of our strategies, but those weren’t driven by large allocation changes. Going into September, we were still underweight U.S. large caps, overweight small and international small, underweight REITs and Commodities, and overweight long-term Treasuries. Our long term expected return for U.S. large caps dropped once again to another new low.

 

Performance Attribution

While all our strategies posted positive returns for the month, most did trail their relative benchmarks. Our relative tilts, i.e. our over/underweights to the long-term allocations, which favored U.S. small, emerging markets, and duration and higher credit quality over junk within the fixed income allocations all worked against us. Our overweights to international small and managed futures were beneficial.

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INDEX
INDEX DESCRIPTION
S&P 500
Represents US large company stocks. It is a market-value-weighted index of 500 stocks that are traded on the NYSE, AMEX, and NASDAQ
S&P 1500
A stock market index of US stocks made by Standard & Poor’s. It includes all stocks in the S&P 500, S&P 400, and S&P 600
Nasdaq 100
NASDAQ-100 Index includes 100 of the largest domestic and international non-financial companies listed on The NASDAQ Stock Market based on market capitalization
MSCI EAFE Small Cap
An equity index which captures small cap representation across Developed Markets countries* around the world, excluding the US and Canada
MSCI EAFE Value
An equity index which captures large and mid cap value representation across 21 Developed Markets countries
around the world, excluding the U.S. and Canada.
MSCI Emerging Markets
An Index that captures large and mid cap representation across 27 Emerging Markets (EM) countries
Russell Micro Cap
Measures the performance of the microcap segment of the U.S. equity market
S&P / LSTA U.S. Leveraged Loan 100
Designed to reflect the performance of the largest facilities in the leveraged loan market
Bloomberg U.S. Corporate High Yield
Measures the USD-denominated, high yield, fixed-rate corporate bond market
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 U.S. Aggregate Bond
Measures the performance of the U.S. investment grade bonds market. The securities must have at least one year remaining to maturity, must be denominated in U.S. dollars and must be fixed rate, nonconvertible and taxable.
Bloomberg Municipal Bond
A market-value-weighted index for the long-term tax-exempt bond market
Bloomberg U.S. Treasury 20+
Measures US dollar-denominated, fixed-rate, nominal debt issued by the US Treasury with 20+ years to maturity
Bloomberg U.S. Corporate
Measures the investment grade, fixed-rate, taxable corporate bond market
WTI Crude
WTI is the underlying commodity of the New York Mercantile Exchange’s (NYMEX) oil futures contract and is considered a high-quality oil that is easily refined.
The benchmarks for the Global Opportunities, Long-Term Growth, Moderate Growth (previously Growth & Income), Balanced, Conservative Multi-Asset Income, Conservative, and Capital Preservation strategies are combinations of indices representing the asset class groups shown in the table below. The benchmark for the Focused Opportunities strategy is a US Large Cap asset class index. The benchmarks for the Absolute Return Plus and Absolute Return strategies are Absolute Return asset class indices. The benchmark for Short-Term Reserve is a 1-5 Yr. Treasury Bond index. Underlying constituents are available upon request at no cost. In the case of indices that include foreign securities, index returns are still presented on a total return basis, but will be net of foreign taxes on income generated by these securities.
In order to better represent the asset classes Frontier was investing in over different time periods, the blends for those time periods are shown below. Current represents as of the date of this material.
Capital Preservation Bench
Inception- Mar 21            Apr 21 – Current
Inception – Apr 04
Conservative Bench
May 04 – Mar 21
Apr 21 – Current
US Equity
10%
10%
30%
15%
24%
International Equity
0%
0%
10%
5%
4%
Real Assets
15%
7%
0%
15%
4%
Alternatives
25%
23%
0%
25%
16%
Fixed Income
40%
60%
40%
40%
52%
Cash Equivalents
10%
0%
20%
0%
0%
Inception – Apr 04
Balanced Bench
May 04 – Mar 21
Apr 21 – Current
Inception – Apr 04
Moderate Growth Bench
May 04 – Mar 21
Apr 21 – Current
US Equity
45%
30%
40%
60%
45%
52%
International Equity
15%
15%
14%
20%
20%
24%
Real Assets
0%
10%
2%
0%
10%
0%
Alternatives
0%
20%
6%
0%
15%
4%
Fixed Income
40%
25%
38%
20%
10%
20%
Inception – Apr 04
Long-Term Growth Bench
May 04 – Mar 21
Apr 21 – Current
Global Opportunities Bench
Inception – Mar 21            Apr 21 – Current
US Equity
70%
50%
58%
0%
60%
International Equity
30%
30%
32%
0%
40%
Global Developed
0%
0%
0%
100%
0%
Real Assets
0%
10%
0%
0%
0%
Alternatives
0%
10%
0%
0%
0%
Fixed Income
0%
0%
10%
0%
0%

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