Inflation Picks Up

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


U.S. Market Picks up Steam

In the month of July, international developed stock markets returned 0.66%. The U.S. and Europe ex UK recorded returns of 2.34% and 2.12%, respectively. Japan and Pacific ex Japan lagged other markets. The Canadian stock market, which has a large natural resource exposure, is up 20.45% YTD. International developed markets are up 10.65% YTD. The spread of the Delta COVID variant has introduced more short-term risk to the global economic recovery, but U.S. economic activity such as travel and restaurant dining continues to accelerate.


Emerging Markets Drop in July

Broader emerging markets posted a -6.63% return for the month. Mexico and India recorded returns of 2.29% and 0.86%, respectively. China and Brazil lagged other markets in July. The Chinese market dropped significantly due to increased regulatory scrutiny of many large technology companies. Emerging markets in the aggregate are up 0.93% YTD, lagging due to a retracement in technology shares and a COVID-19 resurgence. Commodity-oriented markets may continue to receive a boost as monetary and fiscal stimulus flows through the global economy. These countries may benefit from any infrastructure projects or alternative energy initiatives.


Healthcare and Utilities Outperform

Healthcare and utilities recorded returns of 3.46% and 3.22%, respectively, in July. Energy and consumer discretionary lagged other sectors. The energy sector, after a strong six-month period, was negatively affected by the accelerating spread of the Delta Covid variant. However, governments and corporations are encouraging more people to get the vaccine, which would help sustain the economic recovery.


Value Flat for the Month

In July, value underperformed growth in the large-cap space but outperformed in the small-cap space. Momentum recorded a return of 3.30%. Small-cap value stocks started the year strongly and are now up 22.16% 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 1.20% while small-cap emerging market stocks posted a return of -2.81% this month. Small-cap emerging market stocks are still up 13.04% 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.


Federal Reserve May Tighten Earlier than Expected

In July, the three-month Treasury bill index returned 0.01% 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 recently high inflation numbers, labor scarcity, and pending stimulative legislation 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 5.32% over the past year through the end of June.


Fixed Income Steady in July

The returns of deflationary hedges were mostly positive for the month. Long-term government bonds returned 3.63% in July after a strong June. They are only down -4.47% YTD. The Bloomberg Barclays U.S. Agg Bond Index returned 1.12% in July. Catastrophe bonds are up 5.24% over the past year, providing a competitive yield without the equity-like volatility of leveraged loans and high-yield bonds. Real yields continued to drop as inflation picked up, but interest rates declined.


REITs and Natural Gas Post Strong Month

Inflation-sensitive investment returns were mostly positive for the month. U.S. natural gas and U.S. REITs were up 8.01% and 5.32%, respectively. The Bloomberg Commodity index posted a return of 1.84%. WTI crude oil is now up 54.83% 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.


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, Chinese Yuan, 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.

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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