October 2021 | Global Equity Markets
The September decline, which was only the second drop of 2021, transitioned into the best monthly performance of the year in October. Large capitalization stocks led the market higher with the S&P 500 total return of 7.0%, followed by the S&P 400 Mid Cap Index and S&P 600 Small Cap Index returns of 5.9% and 3.4%, respectively.
Typically, when markets have a strong month, the cyclical stocks lead the charge as was the case in October. The snap back in economically sensitive stocks was broad and represented the best relative return since February for companies most levered to continued expansion in the economy. From a style perspective, growth rebounded versus value in October as technology stocks led the move higher after the September decline.
The echo boom in activity from the pandemic low last year has resulted in massive logistical challenges which has created higher prices and uncertainty about monetary policy reaction. Many surveys today show inflation has replaced COVID as the biggest worry on the minds of investors. Data has shown measurable slippage in real growth as we enter the final months of the year. The initial estimate of Gross Domestic Product was 2.0%, less than 1/3rd the rate of the prior quarter’s 6.7% expansion. Corporate earnings continue to power ahead but as the graph below illustrates the rate of increase on estimated earnings over the next year has slowed from the torrid pace of earlier this year. Word searches on quarterly earnings calls have noted a meaningful rise in negative phrases associated with supply chain disruptions and input costs from both materials and labor. On a positive note, dividend payments have resumed in impressive fashion and now exceed the level which existed pre-pandemic levels also seen in the chart below.
International market returns trailed the S&P 500 during October. The S&P Developed ex-U.S. BMI returned 2.5% last month and similar to the U.S. pattern, smaller capitalization stocks performed less well. Developed market Europe was the strongest among non-U.S. bourses while Asia trailed, and Latin America markets were weakest. Emerging markets were up 1.0% as measured by the S&P Emerging Market BMI Index with Europe and Asia doing better than other regional markets. The value of the dollar was a neutral factor in international market returns to a U.S. investor as it was little changed during October. As noted in the above commentary on the U.S., market fundamental earnings estimates and dividends paid are also increasing globally and supportive of our interest in international allocations for clients. Recent patterns in earnings growth in international companies are in line with U.S. estimates yet available at more attractive valuations.
The tailwinds which were highly supportive of improving fundamentals for equities are beginning to wane. Earnings estimates are increasing but at a slower pace. Consensus is also building for an inflationary environment which will not dissipate as quickly as originally expected. A key metric to watch will be interest rates as the Federal Reserve has signaled a reduction in bond purchases which has been supportive of low rates. While stocks often rise along with interest rates it is a less hospitable environment than when both markets rise together. These factors are not exclusively a U.S. condition; however, we believe are less visible in global markets while valuation is more compelling.
Notes & Disclosures
Index Returns – all shown in US dollars
All returns shown trailing 10/31/2021 for the period indicated. “YTD” refers to the total return as of prior-year end, while the other returns are annualized. 3-month and annualized returns are shown for:
- The S&P 500 index is comprised of large capitalized companies across many sectors and is generally regarded as representative of US stock market and is provided in this presentation in that regard only.
- The S&P 500® Equal Weight Index (EWI) is the equal-weight version of the widely-used S&P 500. The index includes the same constituents as the capitalization weighted S&P 500, but each company in the S&P 500 EWI is allocated a fixed weight - or 0.2% of the index total at each quarterly rebalance. The S&P 500 equal-weight index (S&P 500 EWI) series imposes equal weights on the index constituents included in the S&P 500 that are classified in the respective GICS® sector.
- The S&P 500 Growth Index is comprised of equities from the S&P 500 that exhibit strong growth characteristics and is weighted by market-capitalization.
- The S&P 500 Value Index is a market-capitalization weighted index comprising of equities from the S&P 500 that exhibit strong value characteristics such as book value to price ratio, cash flow to price ratio, sales to price ratio, and dividend yield.
- The Russell 3000 Index tracks the performance of 3000 U.S. corporations, determined by market-capitalization, and represents 98% of the investable equity market in the United States.
- The Russell Mid Cap Index measures the mid-cap segment performance of the U.S. equity market and is comprised of approximately 800 of the smallest securities based on current index membership and their market capitalization.
- The Russell 2000 Index is a market-capitalization weighted index that measures the performance of 2000 small-cap and mid-cap securities. The index was formulated to give investors an unbiased collection of the smallest tradable equities still meeting exchange listing requirements.
- The MSCI All Country World Index provides a measure of performance for the equity market throughout the world and is a free float-adjusted market capitalization weighted index.
- The MSCI EAFE Index is a market-capitalization weighted index and tracks the performance of small to large-cap equities in developed markets of Europe, Australasia, and the Far East.
- The MSCI Emerging Markets Index is a float-adjusted market-capitalization index that measures equity market performance in global emerging markets and cannot be purchased directly by investors.
- The S&P Global BMI sector indices are into sectors as defined by the widely used Global Industry Classification Standards (GICS) classifications. Each sector index comprises those companies included in the S&P Global BMI that are classified as members of respective GICS® sector. The S&P Global BMI Indices were introduced to provide a comprehensive benchmarking system for global equity investors. The S&P Global BMI is comprised of the S&P Emerging BMI and the S&P Developed BMI. It covers approximately 10,000 companies in 46 countries. To be considered for inclusion in the index, all listed stocks within the constituent country must have a float market capitalization of at least $100 million. For a country to be admitted, it must be politically stable and have legal property rights and procedures, among other criteria.
- The Barclay’s US Aggregate Index, a broad-based unmanaged bond index that is generally considered to be representative of the performance of the investment grade, US dollar-denominated, fixed-rate taxable bond market.
- The Bloomberg Barclay’s US Corporate High Yield Index, which covers the USD-denominated, non-investment grade, fixed-rate, taxable corporate bond market.
An index is a portfolio of specific securities, the performance of which is often used as a benchmark in judging the relative performance to certain asset classes. Index performance used throughout is intended to illustrate historical market trends and performance. Indexes are managed and do not incur investment management fees. An investor is unable to invest in an index. Their performance does not reflect the expenses associated with the management of an actual portfolio. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk. All investing involves risk including loss of principal. Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal, and potential liquidity of the investment in a falling market. Past performance is no guarantee of future results.
Key Indicators correspond to various macro-economic and rate-related data points that we consider impactful to equity markets.
- The US 10-Year Treasury Yield (%)/bps, is the return on investment for the U.S. government’s 10-year debt obligation and serves as a signal for investor confidence.
- SPDR Gold Trust Price ($), is an investment fund that reflects the performance on the price of a gold bullion, less the Trust’s expenses.
- West Texas Intermediate, which is an oil benchmark and the underlying asset in the New York Mercantile Exchange’s oil futures contract.
- CBOE Volatility Index (Level)/% Change, which uses price options on the S&P 500 to estimate the market's expectation of 30-day volatility.
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