August 2021 Monthly Market Review
Global equities were resilient during August despite the rapid spread of the Delta variant, mixed economic data, and hints of a potential shift in Federal Reserve policy. U.S. equity markets—financials, communications, and technology in particular—outpaced international developed market equities in both local terms and, due to strength in the U.S. dollar (USD), in unhedged terms as well. Ongoing pressure in Chinese equities kept emerging markets (EM) equities from outperforming the U.S., but the asset class did deliver a low single-digit return, retracing about 40% of its decline in July. Strength in EM currency proved to be a tailwind for the asset class. Government bond yields in G-10 countries generally rose, while the curve steepened in the U.S. after minutes from the July 2021 Federal Open Market Committee (FOMC) showed growing support for tapering monthly bond purchases. Categories of real assets were mixed, with commodity-sensitive categories falling and income-oriented sectors rising.
Outside of the Norwegian krone (+1.5%) and New Zealand dollar (+0.9%), the USD rose against all other developed market currencies as markets digested the minutes from the July FOMC meeting. During August, fed funds futures were pricing in a 60% or more chance of higher rates by late fourth quarter 2022/early first quarter 2023 until Fed Chair Jay Powell’s Jackson Hole speech tempered expectations for a rate hike. Against EM currencies, there was more dispersion in the relative value of the USD with weakness in EM currencies like the Chilean peso (–2.1%) and Argentine peso (–1.1%), but strength in currencies like the Uruguay peso (+2.9%), Colombian peso (+2.7%), and Thai baht (+2.0%).
U.S. equities posted their seventh consecutive month of positive performance in August. The Russell 3000 Index gained 2.9%, finishing ahead of MSCI EAFE (+1.8%) and MSCI EM (+2.6%) indices. Recent trends persisted as U.S. growth stocks outpaced their value counterparts for the third consecutive month, with the Russell 3000 Growth Index (+3.6%) besting the Russell 3000 Value Index (+2.0%). Large cap stocks edged
out small caps for the sixth consecutive month, with the Russell 1000 Index (+2.9%) beating the Russell 2000 Index (+2.2%).
Ten of the 11 GICS sectors finished in positive territory. Energy (–1.7%) was the sole sector to post a drawdown as concerns over potential reopening delays caused by the Delta variant weighed on oil prices. Industrials (+0.8%) followed closely behind, dragged down by aerospace and defense stocks. On the other hand, financials (+5.0%) were the best performing sector, recovering from drawdowns in June and July. Communications services (+4.3%) was another standout sector, with Netflix (+10.0%), Alphabet (+7.4%), and Facebook (+6.5%) leading the way. In fact, all FAANGM constituents outpaced the broad market as investors sought to insulate themselves from the sharp increase in COVID-19 cases.
In local terms, developed non-U.S. equities rose 2.2% and kept pace with the returns of U.S. equities over much of the month, but lagged as August came to a close. In USD unhedged terms, strength in the USD against developed market currencies was a headwind and detracted an additional 40 bps from returns in the month. European equities came under pressure in response to an unexpectedly sharp increase in inflation in the euro area and renewed restrictions on transatlantic travel due to rising COVID-19 cases. These factors hampered consumer discretionary (–1.9%) names—the worst performing sector for the month—followed closely by materials (–1.4%), which fell on softer precious metals prices. Conversely, IT (+6.4%) rallied on continued strength in the semiconductor market.
Within emerging markets, volatility remained elevated in China (0.0% USD) as investors reacted negatively to evolving regulatory headlines. As the month progressed, it became clear the scope of regulatory pressure would continue to stretch beyond tech and e-commerce. Regulators targeted a broad range of social issues, including drug pricing, entertainment, and gaming, which included new weekly limitations on playing time for minors due to fears of gaming addiction.
Market concerns were stoked further on August 20th, when China passed the Personal Information Protection Law (PIPL), which will impose strict rules regarding use and protection of customer data and is expected to go into effect on November 1st. While details have yet to be publicized, the news was enough to rattle markets and send the Hang Seng Index into bear market territory; the Index fell 19% from its high on February 17th to August 20st.
Despite continued uncertainty, better than expected earnings from several big tech companies amidst regulatory headwinds helped spark a late month rally. The MSCI China Index gained 3.3% in the final two trading days of the month. JD.com (+10.8%) and Tencent (+0.4%) were among the big tech names that performed well. Agriculture-focused ecommerce platform Pinduoduo (+9.2%) also finished strong after reporting its first quarterly profit since its IPO in 2018.
Yields in G-10 countries modestly drifted higher in August, which led to a 0.3% decline in the Bloomberg Barclays Global Treasury Index on a hedged basis and a 0.5% drop when the strength in the USD is factored in. As previously noted, inflation in Europe came in unexpectedly high, but more important, investors factored in a potential shift in policy accommodation in the United States.
As previously noted, minutes from the July FOMC meeting released during the month pointed to growing support among committee members for a taper this year. Markets seemed to extrapolate the past tapering cycle, which lasted about 10 months, to the upcoming tapering cycle and pulled forward expectations for a rate hike. This notion was put to rest at the Jackson Hole symposium, where Powell indicated rates would stay low for a long time. Nevertheless, the Treasury curve steepened modestly over the course of the month, which led to a 0.4% decline in intermediate Treasuries and a 0.2% drop in long Treasuries.
Within real assets, energy equities and metals and mining equities fell on concern that the spread of the Delta variant would hamper near-term demand for commodities like crude (–7.4%) and industrial metals (0.3%). Continued strength in the USD also put downward pressure on commodities (–0.3%). Despite the modest monthly decline, the diversified Bloomberg commodity index remains 23.0% higher year-to-date through the end of August.
REITs trailed broad equities, but managed a 1.4% gain, led by the U.K. (+3.3%) and Europe (+2.2%), where Delta infections have declined significantly from their June peak. In contrast, the U.S., which has seen a steady surge in infections, managed just a 1.7% advance. By sector, “new economy” or growth-oriented sectors—including self-storage (+5.3%), data centers (+4.6), and industrial (+3.4%)—generally outperformed. Hotels (+2.7%) and retail (+3.2%) fared well during the month, after companies in both sectors reported strong earnings. However, office fell 1.9% as the spread of the Delta variant caused many U.S. employers to delay their return to office plans.