Investor optimism remained elevated in August, leading to weak performance of safe assets and another month of positive returns across risk assets. Safe investments such as global sovereign bonds sold off as yields rose and curves steepened. The U.S. dollar weakened against most currencies. In contrast, global equity markets rallied, led once again by the United States. The outperformance of growth stocks over value stocks persisted during the month across the globe. Lastly, commodity investments performed well as the macro economy continued to heal from pandemic-related shutdowns.
All G-10 countries experienced a rise in yields during August; as a result, the FTSE World Government Bond Index fell 1.0% in local currency terms. With the major central banks anchoring policy rates at low levels, the yield curves steepened. For example, long-term Treasuries fell 4.3% in August and underperformed the 0.5% loss of intermediate-term Treasuries and the 0.0% return of short-dated Treasuries and Treasury bills. This pattern was not unique to the U.S.; it occurred in most bond markets.
Investors in non-U.S. assets benefited from a tailwind from currency translation. As a result of a rising U.S. deficit and the disappearance of an interest rate advantage, the U.S. dollar—as measured by the Dollar Spot Index (DXY)—declined 1.3% in August; the only developed market currency that fell against the greenback was the Japanese yen, which dipped 0.3%. The dollar was also weak against almost all emerging markets (EM) currencies except several South American currencies that declined, including the Brazilian real (–5.1%), Argentine peso (–2.6%), and Chilean peso (–2.4%).
The decline in global bonds and in the U.S. dollar helped fuel gains in equity markets. Global equities rallied in August, a month that is typically characterized by lower trading volumes. The MSCI ACWI Index registered a gain of 6.1%, its largest for the month since 1988. In the U.S., mega cap growth stocks continued to surge. The top five stocks by market capitalization represented over 20% of Russell 3000 Index assets at month-end; Apple, Microsoft, and Amazon alone accounted for over 15%. Apple became the first stock to surpass $2.0 trillion in market cap, a level almost equal to the entire market cap of the Russell 2000 Index. Microsoft and Amazon quickly approached this threshold, while Alphabet also was above $1.0 trillion.
Outside of the top five constituents, Tesla’s stock price appreciated more than 900% from the end of September 2019 through the end of August. As a result, Tesla stock, which has yet to be included in the S&P 500 Index, represented over 1% of Russell 3000 Index assets at August 31st and briefly surpassed Visa to become the seventh-largest company by market cap, just behind Berkshire Hathaway.
The widening gap between growth and value stocks reached unprecedented levels by the end of August. Growth stocks, as represented by the Russell 3000 Growth Index, achieved an all-time high as the month closed and were up 42.4% year-over-year. Conversely, despite sharp volatility, the Russell 3000 Value Index barely budged over the full period, eking out a gain of just 0.4%. The only prior period when growth dominated value at a comparable level occurred at the peak of the tech bubble in early 2000. It was followed by unmatched levels of outperformance for value relative to growth over the subsequent year-plus, as growth stocks—particularly tech-oriented names—declined sharply off then all-time highs.
Developed markets abroad posted a gain of 5.1%. The MSCI EAFE had rallied over 40% since the trough of the coronavirus crisis but still lagged well behind domestic markets for the year-to-date period ended August 31st. This spread can be attributed in part to the varying composition of the markets. The developed non-U.S. space held a significantly lower weight to the types of technology-related stocks that have driven the success of domestic equities. International markets, particularly Europe, were more diversified and offered greater exposure to areas like branded consumer goods, pharmaceuticals, and industrials. These companies have not held up nearly as well as technology, internet, and ecommerce, where many companies benefited from large segments of the population in some form of lockdown due to the COVID-19 pandemic. International markets have also been hurt by greater exposure to traditionally more cyclical sectors. Both the MSCI EAFE and EM indices held more than twice the exposure to energy and materials in aggregate than the Russell 3000 in the month.
EM showed a similar tech-driven, mega cap growth bias as the U.S., but its impact on broad market returns was not as pronounced. Although EM was up just 2.2% for the month, it was up 0.4% for 2020 on gains from constituents including Tencent (+42.4%), Alibaba (+35.3%), and Taiwan Semiconductor (+34.0%). These names, along with Samsung Electronics, combined to account for 23.2% of the MSCI EM Index. Such concentration was comparable to the FAANGM stocks in the Russell 3000, but the performance impact was more muted, due in large part to the struggles of Samsung year-to-date (–4.5%).
The optimism that drove equity markets higher also helped commodity prices rally. Crude prices moved 5.8% higher to close the month at $42.6 per barrel, as improvements in demand and continued muted supply resulted in U.S. inventories declining for five consecutive weeks. Stronger manufacturing data from the both the U.S. and China also supported prices, as did continued weakness in the dollar, which made dollar-priced commodities less expensive for foreign currency holders. After recovering from historic lows by mid-June, oil traded in a narrow range ($38–42 per barrel). This was related to investors’ concerns that the demand recovery was slowing due to virus containment and travel restrictions, as well as corporate and consumer caution. Domestic natural gas prices, which are sensitive to seasonal and weather-related factors, moved sharply higher (+44.0%) on a combination of increased power demand, muted new supply from cautious producers, reduced associated gas production from oil drillers, and optimism from speculators that the coming heating season and improving economic conditions could drive prices higher.
Elsewhere in energy, clean energy stocks (+19.1%) continued to outperform in August, as measured by the S&P Global Clean Energy Index; year-to-date, this group has advanced 47.5%. The sector continued to benefit from declining costs, as well as government mandates and corporate sustainability initiatives. According to the U.S. Energy Information Administration, electrical generation by wind and solar was 16.4% greater than the year before. According to the EIA, wind and solar contributed 12.5% of total electric power production in the U.S. from January 2020 through June 30th.
The universe of investable, pure play, public, clean energy stocks remained constrained to approximately 30 stocks; this includes renewable technology companies, renewable component manufacturers, developers, and some clean energy utilities (production). Some of the largest renewable production owners are traditional utilities or energy companies, including Next Era, which has a large asset base split primarily between natural gas and renewable power plants.
Fed Maintains 2.0% Inflation Target
The U.S. Federal Reserve completed its 18-month analysis of the monetary policy tools at its disposal. The Fed maintained its 2.0% inflation target but adopted an “average inflation regime” whereby policy makers will allow for periods of above-2.0% inflation following periods of sub-2.0% inflation. Essentially, the Fed indicated that it will not be as quick to raise rates as the unemployment rate falls, preferring to allow higher actual inflation over trying to pre-empt a rise in the general price level.