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Market Commentary | June 22, 2021

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Sentiment is running a bit high

As we near the end of the month, growth stocks and long-term Treasuries are somewhat surprisingly vying for the lead, with returns of 3.5% (Russell 1000 Growth) and 3.1% (Bloomberg Barclays U.S. Treasury 20+ Year), respectively through June 21st. The reflation trade is indeed on pause (more on that in a minute) with commodities, small-cap stocks, and value stocks more generally all sitting on losses month-to-date. Further, the dollar’s strength has sapped the life out of international and emerging market stocks, at least for U.S. based investors.

The proximate cause of the reversal of fortunes for growth and value stocks was, in part, all the news out of the Fed last week. On Wednesday, the Fed added two rate hikes to their 2023 forecast and seven of 18 officials on the Open Markets Committee stated that rates at the end of 2022 will need to be higher than where they are today. Then on Friday, James Bullard of the St. Louis Federal Reserve opined on CNBC that rates would probably need to start rising next year, and that sent stocks and commodities in a downward spiral. With this newly expressed hawkishness, the bond market celebrated and pushed yields lower, with the yield on the 30-year falling by 19 basis points in two days.

The other data point that grabbed attention last week was the release of average weekly earnings, which according to the Labor Department increased by about 8% overall since February, with leisure and hospitality jobs seeing a 10.4% increase. Lower wage jobs are benefitting the most from fierce competition for a limited supply of labor, and more firms are offering signing and retention bonuses, bigger raises, and better benefits; the latter items will be particularly difficult to roll back. According to Morgan Stanley and data from the NFIB (National Federation of Independent Business), quality of labor is the number one concern of small businesses at present, with 26% of respondents citing that issue, well above concerns over the cost of labor (8%), and poor sales (5%).


While tech stocks are back in the driver’s seat for the moment, there is increasing speculation about the impact that the new chair of the Federal Trade Commission – Columbia law professor Lina Khan, who has been a vocal critic of big tech – will have on the sector. She was confirmed by a large, bi-partisan margin, 69-28, as both Democrats and Republicans have axes to grind with our tech overlords, albeit for different reasons.


Back to the markets, Bloomberg Intelligence recently reported on the increasing impact of individual investors, who in the first quarter accounted for almost 25% of equity trading volume, up from just over 10% a decade ago. There is indeed a power shift, but where investors are getting the funds to invest is a bit troubling. In a survey conducted by MagnifyMoney at the beginning of April, 80% of Gen Z investors and 60% of Millennials had taken on debt to invest, and we aren’t just talking margin debt. Of all investors who took on debt, 38% took out personal loans, 23% borrowed from friends or family, and 14% used their credit cards. Sentiment may be running a bit high shall we say.


And that sentiment is evident in other areas as well. Real yields on junk bonds, as measured by the Bloomberg Barclays U.S. Corporate High Yield Index, recently turned negative for the first time ever. Investors are willing to take not-insignificant default risk to earn a negative real yield. Wow. Further, corporations have announced a record $567 billion of buyback authorizations through June 11th, according to Goldman Sachs, at a time when we are near all-time highs on most valuation metrics. Kind of makes you wonder what that signals about organic growth opportunities for those companies.


Yes, for the moment being bullish is still paying off, but our work would suggest that investors should greatly temper their expectations going forward. It likely won’t be this easy forever.

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Russell 1000
Measures the performance of the largest 1000 stocks by market capitalization in the Russell 3000 Index
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. Corporate High Yield
Measures the USD-denominated, high yield, fixed-rate corporate bond market.
Russell 2000
Measures the performance of the small-cap segment of the U.S. equity universe.
Russell 2000 Growth
Measures the performance of the small-cap growth segment of the U.S. equity universe.
Russell 2000 Value
Measures the performance of the small-cap growth 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.

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