Monthly Market Report: June 2021

Energy Stocks Continue to Rally

Prepared by Brandon Yee, CFA, CAIA, and Thomas Connelly, CFA, CFP®

U.S. Market Picks up Steam

In the month of June, international developed stock markets returned -1.02%. The U.S. and Canada recorded returns of 2.75% and -0.05%, respectively. The UK and Pacific ex Japan lagged other markets. The Canadian stock market, which has a large natural resource exposure, is up 20.59% YTD. International developed markets are up 9.92% YTD. Global economic recoveries are accelerating, driven by strengthening consumer discretionary spending. U.S. restaurant dining is now positive relative to 2019 levels. U.S. air travel has also picked up, but it is still materially lower than pre-Covid levels.

Information Technology and Energy Outperform

Information technology and energy recorded returns of 5.73% and 3.51%, respectively, in June. Financials and materials lagged other sectors. The energy sector, after a difficult ten-year period and tough 2020, is up 32.07% YTD. The reopening of economies has led to increased gasoline consumption and air travel, benefitting energy stocks in the process. OPEC members are still negotiating any increases in oil production for the remainder of the year, which has introduced some volatility in the energy space.

​Value Outperformance Takes a Breather

In June, value underperformed growth in the large-cap space and small-cap space. Momentum recorded a return of 5.91%. Small-cap value stocks started the year strongly and are now up 26.69% YTD. Even after value’s strong performance this year, relative valuations between value stocks and growth stocks are still high based on many different valuation metrics. Value-oriented sectors such as energy, financials, and materials may still have more room to run.

Growth Outperforms in International Markets

In the international developed markets, growth outperformed value in the large-cap and small-cap space. Momentum recorded a return of -1.86% while small-cap emerging market stocks posted a return of 1.63% this month. Small-cap emerging market stocks are now up 16.30% YTD. The rotation from growth into value may continue as investors become wary of high valuations in growth stocks. Rising interest rates may also pose more of a risk to growth stocks than value stocks.

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Federal Reserve to keep Interest Rates Low

In June, the three-month Treasury bill index returned 0.00% for the month. Interest rates on Treasury bills and money market funds are close to 0%. The Federal Reserve continues to keep interest rates near 0%, but the recent inflation numbers may reopen the possibility of higher interest rates. Savers will still face low short-term interest rates for the foreseeable future, which will negatively impact retirees and people close to retirement. The CPI has increased by 0.38% over the past year through the end of May.

Fixed Income Steady in June

The returns of deflationary hedges were mostly positive for the month. Long-term government bonds returned 3.56% in June but are still down -7.82% YTD. The Bloomberg Barclays U.S. Agg Bond Index returned 0.70% in June. Catastrophe bonds are up 6.17% over the past year, providing a competitive yield without the equity-like volatility of leveraged loans and high-yield bonds. Real yields on many fixed income investments are still negative or close to 0%. Municipal bond yields have dropped as investors search for more yield.

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Crude Oil and Natural Gas Rally

Inflation-sensitive investment returns were mostly positive for the month. U.S. natural gas and WTI crude oil were up 21.08% and 10.87%, respectively. The Bloomberg Commodity index posted a return of 1.85%. WTI crude oil is now up 52.35% YTD and over 80% in the past year. Inflation-sensitive investments are benefiting from the reopening of economies, supply constraints and pent-up consumer demand. After a strong May, gold bullion posted a return -7.20% in June. However, ongoing large fiscal deficits, high debt levels, and easy monetary policy may create tailwinds for gold investors in the coming years.

U.S. Dollar Depreciated Over the Past Year

Over the past year, the U.S. dollar depreciated against most other major currencies. The U.S. dollar appreciated against the Japanese Yen but depreciated considerably against the U.K pound, Australian dollar, and Mexican Peso. The continuation of large U.S. fiscal deficits may weigh on the U.S. dollar in the medium-term to long-term.

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Brandon Yee, CFA, CAIA – Research Analyst

Brandon conducts investment due diligence for Versant Capital Management, and designs and implements tools and processes to support the firm’s research. His background in biology and finance help him to look at challenges from multiple angles, resulting in unique and well-rounded approaches and solutions.

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