FROM OUR INVESTMENT COMMITTEE: Q2 2021 in Perspective
MODERNIST’S ASSET CLASS INVESTING PORTFOLIOS ARE STRATEGICALLY INVESTED WITH A FOCUS ON LONG-TERM PERFORMANCE OBJECTIVES. PORTFOLIO ALLOCATIONS AND INVESTMENTS ARE NOT ADJUSTED IN RESPONSE TO MARKET NEWS OR ECONOMIC EVENTS; HOWEVER, OUR INVESTMENT COMMITTEE EVALUATES AND REPORTS ON MARKET AND ECONOMIC CONDITIONS TO PROVIDE OUR INVESTORS WITH PERSPECTIVE AND TO PUT PORTFOLIO PERFORMANCE IN PROPER CONTEXT.
During the third quarter, global stock markets retracted slightly, reversing the trend from the previous quarter. Politics and global affairs were front and center in September as the uncertain future of Chinese real estate group Evergrande sparked concern among investors internationally, and the continued debate in Congress over raising the U.S. federal debt ceiling caused apprehension in markets at home and abroad. As was the case during the previous quarter, investors continued to eye potential action by the Federal Reserve as markets continued to price in elevated inflation expectations. These events and other factors were able to stall overall stock market growth for the quarter.
For the quarter, U.S. stocks (as measured by the Russell 3000 Index) lost 0.1%, and non-U.S. developed market stocks (as measured by the MSCI World Ex U.S.) lost 0.7%. Emerging market stocks (as measured by the MSCI Emerging Markets Index) lost 7.4%.
The U.S. Dollar Index, a measure of the value of the United States dollar relative to a basket of foreign currencies, increased during the quarter—the U.S. dollar increased by 4.8% compared to foreign currencies. Over the past 12 months, the U.S. dollar increased by 0.4%. The increase in the dollar is a headwind to non-U.S. investments held by U.S. investors for the last 12 months.
U.S. interest rates remained unchanged during the quarter as the Fed continues to maintain a target range of 0.0% to 0.25% for the Fed Funds rate.
For the quarter, U.S. stocks (as measured by the Russell 3000 Index) gained 8.2%, and non-U.S. developed market stocks (as measured by the MSCI World Ex U.S.) gained 5.6%. Emerging market stocks (as measured by the MSCI Emerging Markets Index) gained 5.0%.
The U.S. Dollar Index, a measure of the value of the U.S. dollar relative to a basket of foreign currencies, increased during the quarter. Specifically, the U.S. dollar increased by 2.8% compared to foreign currencies. Over the past 12 months, the U.S. dollar depreciated by 5.1%. The decrease in the dollar is a tailwind to non-U.S. investments held by U.S. investors for the last 12 months.
U.S. interest rates remained unchanged during the quarter as the Fed continues to maintain a target range of 0.0% to 0.25% for the Fed Funds rate.
U.S. Economic Review
Continuing the trend of economic expansion from the previous quarter, the final reading for first quarter 2021 GDP showed an annualized incre ase in economic growth of 6.4%. The unemployment rate finished the quarter at 5.9%, which shows marginal improvement from the previous quarter’s 6.0%. Domestic inflation has begun to pick up with a reading of 3.4% in May 2021 as the Fed’s preferred gauge of overall inflation, the core Personal Consumption Expenditures (PCE) index, crossed above the Fed’s long-term target average of 2.0%.
Financial Markets Review
Both domestic and international stocks across all size and style categories, as well as U.S. real estate investment trust (REIT) securities, had positive performance during the quarter. International stock returns were also impacted during the quarter by the strengthening U.S. dollar. During the quarter, U.S REITs were the best performing and international value stocks were the worst performing. U.S. and global bonds were each up slightly during the quarter.
In the U.S., large-cap stocks outperformed small-cap stocks in all style categories. Growth stocks outperformed value stocks in all size categories except small-cap stocks. Among the nine style boxes, large-cap growth stocks performed the best and small-cap growth stocks experienced the least positive performance during the quarter.
In developed international markets, all style boxes were positive for the quarter. Growth stocks outperformed value stocks in all size categories. Among the nine style boxes, international large-cap growth stocks performed the best and international mid-cap value stocks experienced the least positive performance during the quarter.
Source: Morningstar Direct July 2021. U.S. markets represented by respective Russell indexes for each category (Large: Russell 1000, Value, and Growth; Mid: Russell Mid Cap, Value, and Growth; Small: Russell 2000, Value, and Growth).
Source: Morningstar Direct July 2021. International markets represented by respective MSCI World EX USA index series (Large: MSCI World EX USA Large, Value, and Growth; Mid: MSCI World Ex USA Mid, Value, and Growth; Small: MSCI World Ex USA Small, Value, and Growth).
A diversified index mix of 65% stocks and 35% bonds would have gained 4.0% during the second quarter.
