U.S. Market Drops
In the month of September, international developed stock markets returned -2.87%. Japan and Canada recorded returns of 2.75% and -2.61%, respectively. Europe ex UK and the U.S. lagged other markets. After a tough September, the U.S. stock market is still up 14.99% YTD. International developed markets are up 9.19% YTD. The spread of the Delta COVID variant has introduced more short-term risk to the global economic recovery, but U.S. economic activity remains strong.
Russia Continues to Rise
Broader emerging markets posted a -3.35% return for the month. Russia and India recorded returns of 6.34% and 0.60%, respectively. Korea and Brazil lagged other markets in September. The Chinese market was down as investors assessed Evergrande, a real estate developer, and its large debt issues. Emerging markets in the aggregate are up 0.79% YTD. Emerging markets still trade at a meaningful discount relative to the U.S. market.
Energy and Infrastructure Outperform
Energy and infrastructure recorded returns of 9.20% and -1.28%, respectively, in September. Utilities and materials lagged other sectors. The energy sector continues to rebound after a tough 2020. Oil supply in the U.S. is constrained while OPEC is carefully moderating its output. Oil demand should continue to approve as governments and corporations are encouraging more people to get a COVID vaccine.
DOMESTIC EQUITY FACTORS
Value Outperforms Growth
In September, value outperformed growth in the large-cap space and small-cap space. Momentum recorded a return of -4.97%. Small-cap value stocks started the year strongly and are still up 22.92% 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.
FOREIGN EQUITY FACTORS
Growth Underperforms in International Markets
In the international developed markets, growth underperformed value in the large-cap and small-cap space. Momentum recorded a return of -3.20% while small-cap emerging market stocks posted a return of -2.91% this month. Small-cap emerging market stocks are up 12.35% YTD. The rotation from growth into value may resume 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 to Maintain Low Interest Rates
In September, 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. However, savers will still face low short-term interest rates for the foreseeable future. If inflation continues to rise and rates are still artificially suppressed, then retirees will be negatively impacted because their purchasing power will decrease. The CPI has increased by 5.20% over the past year through the end of August.
DISINFLATION DEFLATIONARY HEDGES
Municipal Bonds Up YTD
The returns of deflationary hedges were mostly negative for the month. Long-term government bonds returned -2.85% in September as the Treasury yield curve steepened. They are down -7.40% YTD. The Bloomberg Barclays U.S. Agg Bond Index returned -0.87% in September. Catastrophe bonds are up 3.74% over the past year, providing a competitive yield without the equity-like volatility of leveraged loans and high-yield bonds. Real yields continue to remain around historical lows.
INFLATION SENSITIVE INVESTMENTS
Oil and Natural Gas Post Strong Month
Inflation-sensitive investment returns were mixed for the month. U.S. natural gas and WTI crude oil were up 32.59% and 9.92%, respectively. The Bloomberg Commodity index posted a return of 4.98%. WTI crude oil is up 58.38% YTD and 87.17% 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, Swiss Franc and Euro but depreciated 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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