Monthly Market Update: July 2021

Despite the shadow of doubt that the Delta variant of Covid-19 continues to cast, global growth continued and inflation refused to slow throughout July.  Countries that are successfully rolling out the vaccine are coping better with the recent increase in Covid-19 cases compared to 6 months ago, with the UK proceeding to fully reopen. The same cannot be said for places like Australia and Indonesia, where vaccination rates are low and restrictions have returned. 

It therefore comes as no surprise that global equity markets were mixed for the month, especially when volatility increased during the middle of the month. Developed markets contributed to positive returns, however, China caused emerging market indexes to move around 6.5% lower. Inflation is still driving conversations but Central Banks are adamant that the current surge is led by supply constraints and that it is transitory in nature. They are still of the opinion that as demand and supply normalize, the pressure on prices will fall and start to settle around their targets. The recovery in the labor market also picked up pace with 850,000 jobs added in June – the largest monthly gain since last August. 

At home, the S&P 500 returned 2.27%. For July, the index posted 7 new closing highs (8 in June, 41 YTD); it has posted new closing highs every month since November 2020. The index’s year to date return now sits at 17.02%, after 2020’s 16.26% gain. In addition, the Dow Jones Industrial Average gained 1.25% bringing its year to date return to 14.14%. The second quarter earnings season also offered reasons for optimism: with over half of the S&P 500 companies having reported earnings by the end of July, close to 90% of those reporting had beaten analysts’ earnings expectations.

Looking at fixed income, moves in the bond market caught the attention of investors as the US 10-year Treasury yields slid further, falling below 1.2% during the month. The slide is likely attributed to a combination of increased Fed and institutional purchases, and the demand from these two groups has overwhelmed supply. The Fed has opted to use some of the pile of cash that it has been building up instead of issuing larger amounts of debt. Similarly, institutions have looked to rebalance over the past couple of weeks following a period of very strong equity gains and elevated cash balances. Usually the bond market sets the tone for overall economic health but many are of the opinion that its current performance does not indicate a looming downturn.  As the technical factors mentioned above fade, it is expected that yields will rise again over the remainder of the year. In addition to the foreseeable reduced demand, President Biden’s infrastructure plans could also act as a catalyst behind an increase in bond yields. 

U.S. corporate credit posted another month of strong returns, with investment grade and high yield indices returning 3.25% and 4.69%, respectively. As of the end of the month, the Bloomberg Barclays U.S. High Yield Index was up 71 bps year-to-date, compared with an 8.44% return for investment grade. With spreads still elevated compared to their levels at the end of 2019, it is anticipated that investors may continue to witness strong performance in credit as the U.S. economy continues to recover.

Asset class commentary

Art

At the beginning of July, Christie’s held the last important auction of the summer before collectors and buyers logged off to vacation for the remainder of the season. Their 20th Century sale in London represented the first big test for the European market since its emergence from the worst of the pandemic. $212M was sold at auction, up from $118M the year before, making it the best summer season yet. Interestingly, almost half of the demand at the auction came from Asian buyers, whereas in previous years their bidding volume usually sat around 30% of total sales. 

Now that we have moved further into summer, sales volume has tapered off, which is to be expected. Whilst there is not much activity currently, auction houses reported numbers from the first half of the year during July. Compared to 2019, sales are up by $200M which makes 1H21 the best half year in 6 years. The momentum is expected to continue post-summer through the end of the year as the art fair calendar is reminiscent of a pre-Covid schedule. 

Single Family Rentals

Demand for single family rentals has not subsided and as a result rents are growing within the asset class at the fastest pace in 15 years according to CoreLogic. In addition, Apartments.com is reporting that rent prices across the U.S. are up 7.5 percent so far this year, which is three times more than normal, and analysts are expecting the trend to continue into the second half of the year. Surging rents could be a warning sign that higher inflation may stick around for longer than what the Fed is predicting.  

Over the past few months, Wall Street has also started to shift capital into the space to capitalize on the profits that could be made due to the mismatch in demand and supply. Private equity firm Blackstone recently purchased Home Partners of America, which manages about 17,000 rental homes, for $6 billion. And J.P. Morgan Asset Management and American Homes 4 Rent announced a deal last year to build more rental homes, targeting the West and Southeast.

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