Strong corporate earnings paired with Fed reassurance for continued accommodative monetary policy have overcome the growing threat of the Delta variant to sustain the rally in stocks in recent months. A $555 billion U.S. infrastructure bill has also been plodding along a path through congress, providing optimism for even more government stimulus.
After lagging value for the first five months of the year, growth stocks regained leadership in June and July as the rise of the Delta variant threatened a return to shutdowns and reduced physical economic activity. At least for now, mega cap technology stocks are being favored as defensive plays when it looks like more people will be staying home, and small cap stocks shine in periods of optimism around COVID-19.
In the UK and India, areas where delta has already spread, the wave peaked after just over two months. There is hope the same will occur in the U.S., but it is unclear if the pattern will repeat. Fed Chairman Powell downplayed the impact of delta on policy, suggesting the economy has learned to adapt, but any slowing in jobs growth will provide more justification to continue bond purchases and ultra-low interest rates. Interestingly, the bond market seems to take a darker view of the pandemic than the equity market. Ten Year Treasury yields rose early in the year on vaccine enthusiasm but have since nearly made a round trip.
International stocks have been trading in a narrow range in recent months, failing to keep pace with the U.S. This is in part due to increasing shareholder-unfriendly behavior by China. Starting with the suspension of Ant Group’s IPO in November, Beijing has taken a series of actions to reign in China’s “big tech” as well as other key sectors. Most recently, the significant private education sector was mandated to be “non-profit.” There are multiple and varied motivations for these actions, but they are causing investors to question ownership rights and long-term profitability of public Chinese companies. For reference, Chinese stocks account for about 5% of the MSCI All Country World Index.
Personal Capital Managed Portfolios: Our diversified portfolios are capturing strong absolute gains in the capital markets. Exposure to alternatives has been beneficial. Within U.S. equities, the more significant allocation to smaller cap stocks had detracted from return after providing significant benefits in the second half of 2020. A lower duration in the bond portfolio has been modestly beneficial so far in 2021.
