Over the course of the past two months, financial markets continued their advance, albeit with more choppiness and less productivity than previous months.  For June, the S&P 500 gained 2%, while the bond market inched up .7%.  However, not all returns were that productive as we observed a shift in trend from prior months, with the NASDAQ leaping over 5% in June, and the growth index (RPG) gaining over 8%. The value index (RPV) declined more than 4% with the pace of declines speeding up during the second half of the month.

In July the S&P advanced 2.2% (even with a mid-month sell off in the broad market), while the bond market gained another 1%.  The NASDAQ underperformed with a 1.2% advance with bigger moves in both directions than the S&P 500.  RPG gained close to 5% while RPV shed another 2%.  It seems to us that the market is trying to sort out the battleground between growth and value and find a direction that is sustainable in an environment where further strength of an improving economy is being questioned.  Breadth is narrowing, and the safety of the large cap, quality balance sheet companies are more attractive from a risk standpoint. The small cap index (IWM) was lower by as much as 7.5% in the middle of the month, resulting in a net decline of 1.5% over the course of the past two months.

WHAT IS DRIVING THE MARKET

Over the course of both June and July, the interest rate environment – or change of the rate environment, more specifically, caught the attention of market participants.  A widely-held belief that rates would continue to rise over the course of the year seemed to falter as treasury and other fixed income yields moved to the downside, often in dramatic fashion.  After peaking at 1.75% at the end of March, the 10-year treasury started to decline, but accelerating in June and July, sinking to 1.2%.  Perhaps the market is expressing concern of the Fed’s ability to normalize rates in an orderly fashion, or perhaps a belief that the organic rise in rates since the pandemic low of .53% almost exactly a year ago came too far too fast.  Regardless, this retreat in rates has created increased demand for growth-oriented stocks, a reversal from what we observed during most of the first half of the year where rising rates pressured growth names and favored more value-oriented stocks.

The Delta variant of COVID-19 is also having an impact on market sentiment which is challenging the re-opening theme. Should a new wave of COVID transmission become an increasingly concerning event, economic activity and the ongoing strengthening of the economy may come under pressure.  Only time will tell on this front, but it is clearly having an impact on market sentiment.

PORTFOLIO ADJUSTMENTS

While we hope you are filling your summer months with outdoor activities, travel, and time with family and friends, we have remained focused on managing risk and seeking out productive areas in the market that positively impact your portfolio.  As such, we implemented a sizable shift in our risk models over the past two months that were consistent with the pricing trends stated above and observed in our day-to-day evaluation of money flows.

June 

June 3 – The first trading day of June we closed out our productive position in the Select Financial Sector Fund (XLF), capturing a 12% gain. The proceeds were allocated to a Eurozone Fund (EZU) to capitalize on recent strength in Europe.  Since the sale, XLF has fallen over 5%, and EZU has declined 1.5%

June 4 – we sold the mid cap core fund (IJH), capturing a 2.5% gain and repositioned the proceeds to an S&P 500 fund (SPLG); Since the trade, IJH has declined .6% and SPLG has gained 4.8%;

June 24 – on the back of a sizable mid-month decline in the value style, we limited losses in RPV and VLUE to 2.9 % and 2.5% respectively, with the proceeds being re-invested in a large cap blend fund (VV) and a quality factor fund (QUAL).  Since the trade, RPV has declined an additional 1.8%, VLUE gained .9% while VV has gained 3.5% and QUAL has gained 5.4%

June 29 – given the observed relative weakness in small cap stocks and market breadth narrowing, we closed out our S&P 500 equal weight position (RSP) that we have held since February 19th, capturing a 10% gain and outperforming the cap weighted S&P 500 by 1%.  Proceeds were repositioned in XLG, the S&P top 50 largest companies.  Since the trade, RSP has gained 1.7% while XLG has gained 2.9%.

July 

As the growth style continued to exhibit strength relative to the broad market, we repositioned the large cap blend fund VV to VUG, a large cap growth fund.

As of the end of July, TWG risk models are overweight large caps to small caps, and growth to value.  We are maintaining a modest 10% exposure in the value space via FAB and EZU as our opinion is that with the ongoing tug of war between styles, appropriate diversification would indicate importance to maintain some degree of balance between the two.

LOOKING AHEAD

As we look to the second half of the year, we remain cautiously optimistic that the markets can continue their advance.  The Fed has declared it’s “lower for longer” interest rate policy mantra, and, even in the face of concerns over the Delta variant, economic activity continues to improve.  Abundant cash still on the sidelines should continue to find its way into the market, and the “buy the dip” mentality is still intact given the two shallow drawdowns during June and July were quickly bought.  Further, earnings season is reflecting continued year-over-year earnings growth, though this reporting period still incorporates the earnings recession from 2020 as the economy started the post-recession repair.  Even more, as interest rates have fallen and continue to stay at suppressed levels, investors should continue to hunt for more attractive yields in stocks, another factor that we feel supports higher equity prices moving forward.

We do anticipate ongoing choppiness and a continued tug of war between growth and value, to which we will respond and reposition accordingly as we follow our rules-based, price observation process.

Until next month, take care and keep continue seeking out activities that bring you joy and happiness.