Anna Rathbun, Chief Investment Officer
The global supply shortages have resulted in much lamentation about rapidly rising prices, but it has now become clear that the ripple effect has extended into our recovery prospects. In the U.S., the Purchasing Managers Index for manufacturing and services sectors disappointed as surveys revealed longer supply delivery times and shortages weighing on businesses. Consumer sentiment surveys also uncovered some anxiety around affordability of housing, and the computer chip shortage that has now famously pushed up car prices have translated to falling sales. Some of these stories are isolated to select industries, but there is a growing view that the recovery momentum may be slowing down. And the Delta variant’s spread across the unvaccinated areas of the globe is curbing expectations of blockbuster growth in the second half of the year. Although the financial markets continued to rise in the aggregate, the dispersion under the hood reflected these general concerns.
The S&P 500 Index continued to hit multiple highs during the month and ended July as the sixth consecutive month of positive returns.
Despite ending the month in the green, the markets experienced bouts of volatility as concerns about the pace of global recovery crept into sentiment, which led to investors seeking defensive sectors.
The earnings growth profile for companies in the S&P 500 Index for Q2 2021 earnings season is one of optimism and much of this positive corporate news is baked into the price.
Developed markets outside the U.S. registered positive returns with currency having a minimal impact as the vaccination success in Europe has allowed the countries to reopen their economies confidently.
Developing markets underperformed significantly with MSCI China returning -13.84% for the month. The headwind for the EM index same from government interference in the tech industry and a surprise crackdown in education surprised investors.
In the fixed income markets, the descent of the longer yields signaled a firm disagreement with the popular inflation narrative during the second quarter, and in July, the headlines seemed to catch on to what the bond market was pricing in.
Falling yields mean rising bond prices, and despite spreads widening from equity market volatility, duration and coupon income were the two outperforming factors in the bond market.
In the heat of the summer, the pace of economic growth is losing some steam. While the base case for recovery relies on the healthy state of consumer balance sheet, improving corporate earnings fundamentals, and progress in vaccination, there are a few things on our minds that may serve as bumps on the road to growth. We have seen that producers are willing to pass down their input prices increases to the consumers, but the consumer appetite to accommodate these increases will be put to the test in the coming months. The infrastructure bill discussions in Washington are expected to continue beyond the August recess, and the details on the funding side of the bill may have tax implications. Adding to the noise will be negotiations around the debt ceiling that looms ahead. Finally, the vaccination effort seems to be plateauing in the U.S., which makes the Delta variant conversation more relevant as the summer heat wanes. In the end, what matters is our reaction to the Delta variant, both in policy and in individual behavior. The road to economic restoration looks a bit cluttered, but we expect the U.S. economy to plow ahead.
For more information on the July financial market activity, please contact CBIZ Investment Advisory Services.
The information included in this update is provided for informational purposes only and should not be construed as investment advice. The views expressed are those of the author based on the data available when this update was written and are subject to change based on market conditions or other factors. CBIZ Investment Advisory Services and/or CBIZ Retirement Plan Services disclaims any liability for any direct or incidental loss incurred by applying information supplied in this update.
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