“Good investors gather information, put that information into current and historical context, then make sound decisions.”
Being invested in June can be like that long road trip to the mountains or the shore. You aren’t the driver, the good road food is gone, and you can’t find that comfortable position so you don’t snooze. You might be in Illinois or Iowa or Kansas or somewhere in that vast space called Texas, it really doesn’t matter. All you know is that you are still on the road in the middle of somewhere. Not home. Not there yet. Just still invested in June. In spite of the lack of sensory response, progress is being made. Year-to-date all of the major equity indexes continue to make progress. Most of that progress was made January through April, as May and June have seen a number of detours and diversions for road construction. That tends to make the ride more bumpy and less enjoyable, but we are still farther down the road than we were a couple of months ago. It just doesn’t feel that way.
For those number geeks out there, like me, here are some statistics. The Dow Jones Industrials Average (DJIA) is up +13.06% YTD but down -0.62% in June. The Dow Jones Transportation Average is up +19.28% YTD but down -5.75% so far in June. The S&P Composite 1500 Indexes have similar inconsistencies, with the Financials Sector up +25.01% YTD but down -3.19% for June, and the Materials Sector is up +15.34% YTD but down -5.65% for June. The S&P Composite 1500 Energy Sector is up +3.96% in June, and up +45.89% YTD, but has been the most volatile sector in the month of June, often up or down over 1% daily.
We made a number of thematic portfolio changes in the second quarter. The most significant of these changes is in recognition of the inflationary pressures that are growing in the U.S. economy. In May of 2021, all 32 of the commodity indicators monitored by the U.S. Bureau of Statistics rose. Prices are rising across all fronts. While the Federal Reserve still chooses to sit on their 2% acceptable average inflation number, it is more than evident that the situation is advancing much more rapidly. Portfolio adjustments made in the quarter include the addition of inflation sensitive sectors such as financials, basic materials, energy, and real estate.
These changes took us off the ‘interstate highway system’ for a while. Part of traveling on the interstate is that you have to take the exit and entrance ramps as they become available, which may not be exactly when you want. We took profits from the November election rally, and we took profits from the COVID pandemic relief rally. Those were the exits. Then we reentered the interstate highway system with positions in the aforementioned inflation sensitive sectors, as it turns out, right before even more ‘road construction ahead’ signs appeared in May and June.
International equity markets have been thumping along behind U.S. equity markets, still the trailers in the rear view mirror.The MSCI EAFE Index is down -0.41%, and the MSCI Europe Index is down -0.50% in June. Both indexes are still up YTD with the MSCI EAFE up +9.97% and the MSCI Europe up +12.95%. the MSCI Emerging Markets Index is up +1.75% for June and up +7.89% YTD. Bond markets provided some cushion in June.The Bloomberg Barclays U.S. Aggregate Bond Index gained +0.56%, while the Bloomberg Barclays Municipal Bond Index gained +0.18% and the Bloomberg Barclays U.S. Corporate High Yield Bond Index gained +1.17% in June. Inflationary pressures invariably affect bond markets, and are, in fact, their worst enemy. Accordingly, we remain on high alert with all bond markets.
The outlook for equity markets for the remainder of the year remains quite positive. Even though inflation is a negative for bonds, historically it is a positive for equities, especially in the early stages. Toss in the low interest rates, low unemployment, and post-COVID economic expansion, and this road trip should be quite tolerable. Which will make the mountains and the shore that much sweeter when they are on the horizon.
Edward D. Foy, Manager, SELECTOR® Money Management, Chief Investment Officer, Foy Financial Services, Inc.