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?
- 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.
- 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.
- 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.
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.
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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.
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.
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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 countriesaround 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 BenchInception- Mar 21 Apr 21 – Current |
Inception – Apr 04 |
Conservative BenchMay 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 BenchMay 04 – Mar 21 |
Apr 21 – Current |
Inception – Apr 04 |
Moderate Growth BenchMay 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 BenchMay 04 – Mar 21 |
Apr 21 – Current |
Global Opportunities BenchInception – 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% |