June 2021 Monthly Market Review
June delivered a mixed—but overall positive—month for capital market returns. Although accommodative monetary and fiscal policy remained in place, growing gridlock in the U.S. Congress and perceptions of a more hawkish Federal Reserve stoked uncertainty. Inflation expectations moderated in June despite a large increase in energy prices. However, some market participants see a possibility for the U.S. to have a “Goldilocks” economy (positive economic growth, falling unemployment, reasonable inflation expectations). This view contributed to strength in the U.S. dollar and gains in both U.S. equities and fixed income markets during the month.
The Biden administration reached an agreement on infrastructure with a bipartisan group of senators in the last days of June. According to a factsheet published by the White House, the plan totals $579 billion in physical infrastructure spending—less than the $2.25 trillion proposed in the American Jobs Plan unveiled in March. Further, the new plan would not require a change in tax policy to pay for it. The deal excludes “human infrastructure” spending, which Democrats still wish to pass, most likely through the budget reconciliation process. Future fiscal support has grown murky given that the bipartisan agreement may not receive enough votes to avoid a filibuster of the bill.
Investors perceived the Federal Reserve to be more hawkish following its mid-June meeting. Although no changes were made to policy rates or to the $120 billion per month bond-buying program, there were notable language shifts in the post-meeting statement.
More importantly, the Summary of Economic Projections (SEP) released on the same day show two rate hikes in 2023, a significant change from the SEP released in March. Subsequent speeches by Federal Open Market Committee (FOMC) members in the weeks following the meeting suggested the following: Despite the change in the dot plot, policy remained accommodative; however, markets are beginning to change FOMC expectations are for a tapering of quantitative easing as early as this year. This could be a precursor to rate hikes.
As a result of accommodative policy potentially reaching an inflection point, inflation expectations moderated somewhat during June after peaking in April/May. The five-year breakeven rate declined from 2.6% in May to 2.5% in June, while the 10-year fell 10 bps to 2.3% in the same period. The forward inflation rate, known as the 5×5 breakeven or the five-year inflation rate five years from now, fell 11 bps to 2.2% in June—just modestly above the Fed’s 2% average inflation target.
As inflation expectations waned, pro-cyclical equity market sectors such as materials (−5.3%) and industrials (−2.2%) declined. Gold, often viewed as a hedge to inflation, fell 6.9%. Energy commodities saw increased price pressure in the month. Oil prices gained between 8.6% (Brent) and 10.8% (WTI), while natural gas rose 25.4%.
During the month, WTI crude prices reached $75 per barrel for the first time since 2018. Surging demand from developed economies and ongoing OPEC+ cuts underpinned the continued recovery in pricing. U.S. shale producers remained disciplined with production and generally continued to focus on generating stronger cash flows and returning capital to investors.
In aggregate, their daily production was 2 million barrels lower than pre-pandemic highs.
Currency changes impacted markets as well. The U.S. dollar, as measured by the Dollar Spot Index, rose 2.7% during the month. Out of 81 currencies that are not pegged to the value of the U.S. dollar, only 12 appreciated against the dollar, the most notable being the Brazilian real (+4.6%), the Seychelles rupee (+4.0%), and the Georgia lari (+3.4%). The U.S. dollar contributed to performance differentials across global equity markets.
U.S. equities notched their fifth consecutive gain in June. The Russell 3000 Index gained 2.5%, finishing ahead of the MSCI EAFE (−1.1%) and MSCI EM (+0.2%) indices. Two factors explain the performance differences. First, and as previously mentioned, the U.S. dollar appreciated against the vast majority of its peers. Second, U.S. indexes were tilted more toward growth sectors than their international counterparts.
In a reversal from earlier in the year, U.S. growth stocks outpaced their value counterparts; the Russell 3000 Growth Index gained 6.2% versus a 1.1% drawdown for Russell 3000 Value Index. Likewise, large cap stocks outpaced their small cap counterparts after lagging earlier in the year; the Russell 1000 Index gained 2.5% versus 1.9% for the Russell 2000 Index.
Performance dispersion among sectors was high. Just six of the 11 GICS sectors finished the month in positive territory. After lagging earlier in the year, IT (+7.3%) was the best performer, buoyed by blue chips such as Apple (+9.9%) and Microsoft (+8.5%). Other FAANGM components posted smaller gains, but all outperformed the broad market. Outside of FAANGMs, energy (+5.0%) maintained its momentum, propelled by an uptick in oil prices. On the other hand, materials (−5.3%) and financials (−3.0%) were the two worst performers, with each posting strong gains earlier in the year.
The yield curve flattened modestly in June. The front end of the curve remained fairly anchored at the zero lower bound. The two-year note rose 9 bps to 0.25%, potentially taking its cue from Fed rhetoric on rates. Long-term yields experienced a 13 bps decline in the 10-year to 1.45%. The 30-year yield dropped 20 bps to 2.06%, as a smaller inflation premium was built into required compensation for bonds. As a result of changes in the shape of the yield curve, long-term Treasuries gained 3.6% during the month and outperformed their short-to-intermediate maturity counterparts. Falling yields and tighter spreads helped corporates with a 1.6% gain in investment-grade corporates and a 1.3% increase in high-yield.