Monthly Market Recap – June 2021

-Darren Leavitt, CFA

US financial markets were able to rally to new records in June despite a more hawkish Federal Reserve and rhetoric that suggested the US economy had seen peak growth and peak inflation expectations.   A flattening yield curve over the month helped growth issues outpace value-oriented cyclical issues.  The financial sector was bid higher late in the month on better than expected stress test results which induced bank CEOs to boost their dividends and stock buy-back programs.  In Washington, a Bipartisan plan of infrastructure spending was laid out to the tune of 1.2 trillion dollars of spending, of which 579 billion will be new funds.  Economic data was mixed over the month, but there did appear to be an improvement in the labor market.

Source: YCharts – 7/5/2021

The S&P 500 tacked on 2.27% for the month, the Dow fell 0.21%, the NASDAQ climbed 5.59%, and the Russell 2000 gained 0.69%.  A profound flattening of the yield curve saw shorter-dated maturities yield’s increase and longer-dated maturities yield’s fall.  The 2-year note yield increased nine basis points to close at 0.25%.  The 10-year bond yield fell fourteen basis points to close at 1.59%.  When yields rise, bond prices fall, so the shorter end of the curve underperformed over the month.  Gold prices fell $115.8 or 6% in June to close at 1786.40 an Oz.  Oil prices continued to surge, gaining 13% on the month to close at 74.92 a barrel.  Developed and emerging international markets struggled over the month due to renewed concerns that further lockdown measures may be needed as a new variant of Covid-19 materialized. Developed international markets lost 2.76%, while Emerging markets gave up 1.52%.

A more hawkish Federal reserve took investors by surprise in June.  The Fed did not change its policy rate at the June meeting or change its asset purchase program.  However, expectations for the future path of the policy rate did change, and the Fed’s dot plot suggested that there could be as many as two rate hikes starting in 2023.  Additionally, 7 Fed Presidents conveyed their desire to raise rates in 2022.  Later in the month, Fed Chairman Jerome Powell reiterated that there would not be any move in rates until  necessary and said the Fed would telegraph the timing of its QE taper.

Economic data related to inflation came in a bit hotter than expected in June. However, investors seemed to dismiss the higher numbers and suggested that the higher readings were due to transitory factors.  The Consumer Price Index was up 0.6% on a month-over-month basis or 5.8% on an annualized basis.  Producer prices also increased in May.  The PPI was up 0.8% on a month-over-month basis.  Retail sales fell more than expected, falling 1.3% versus the expectation of -0.6%.  Higher input prices curbed new Home Sales while existing home sales came in better than expected.  Sentiment indicators such as Consumer Confidence and Consumer Sentiment continued to be strong in June.

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