Markets Perform Well in Second Quarter
Global equity markets had a choppy second quarter, but when the final Wall Street-bell chimed on June 30th, global markets had turned in solid performance numbers on their way to new record highs.
For the second quarter of 2021:
- The DJIA started the quarter at 33,153 and ended at 34,502 for a gain of 4.1%;
- The S&P 500 started the quarter at 4,020 and ended at 4,298 for a gain of 6.9%;
- NASDAQ started the quarter at 13,480 and ended at 14,504 for a gain of 7.6%; and
- The Russell 2000 started the quarter at 2,254 and ended at 2,311 for a gain of added 2.5%.
However, many are glossing over the numbers from the second quarter and are focusing on how the market performed for the first six months of the year – and those numbers are eye-popping, as:
- The DJIA is up 12.9% YTD;
- The S&P 500 is up 14.7% YTD, which is its best first half of the year since 1998 (which was the height of the dot.com bubble);
- NASDAQ is up 12.6% YTD; and
- The Russell 2000 is up 17.0% YTD.
The themes that drove the markets in the second quarter were plentiful: with inflation worries, sooner-than-expected rate hike concerns, better-than-expected corporate earnings, rising consumer confidence, red-hot housing, rebounding economic data, and rising oil prices all competing for attention.
Further, we saw that:
- Volatility, as measured by the VIX, trended down in the second quarter, starting slightly over 17 and ending the month at 15.47.
- West Texas Intermediate crude rose again in the second quarter, ending north of $75/barrel, for a three-month gain of $15/barrel, a level not seen since 2018. Further, WTI has climbed more than 50% in six months, having started 2021 at $48/barrel.
Market Performance Around the World
Investors were thrilled with the quarterly performance around the world, as 34 of the 35 developed markets tracked by MSCI were positive for the second quarter of the year. Of the 40 developing markets tracked by MSCI, 34 of them were positive too.
|MSCI EAFE – INTERNATIONAL||+4.37%|
|MSCI EURO – EUROPE||+5.51%|
|MSCI NORTH AMERICA||+8.58%|
Source: MSCI. Past performance cannot guarantee future results
So far, the first six months of the year has witnessed a steady market rise, but there were also some rather odd moves that had everyone buzzing:
- Bitcoin exploded and doubled to $60k and then cratered back down to $30k.
- Lumber prices went crazy and then came back down to earth, dropping 40% in the month of June alone to end the second quarter about where they started the year.
- Meme stocks like GameStop and AMC took off again. AMC started the year at about $2/share and skyrocketed to over $54/share while GameStop went from about $17 to over $200.
Despite a few spikes of volatility throughout the second quarter, U.S. equity markets continued their surge from the last two quarters and continued reaching new highs.
Yes, there were some negative economic data points along the way and yes, the rise in interest rates is generally a headwind for stocks, but the markets kept marching forward as companies reported better than expected earnings and positive earnings surprises.
Sector Performance Rotated in 2Q2021
The overall trend for sector performance for each of the first six months and the first and second quarters was good, but the performance leaders and laggards did rotate throughout, suggesting that a sector rotation might be underway.
For perspective, recall that this time last year, the second quarter of 2020 ended with every single one of the S&P 500 sectors painted green.
- Q32020 ended with 10 of the 11 positive;
- Q42020 ended with all 11 sectors positive; and
- Q12021 ended with all 11 sectors positive.
For the second quarter of 2021, 10 of the 11 sectors were painted green. Here are the sector returns for the shorter time periods:
|S&P 500 Sector||1Q2021||2Q2021|
Reviewing the sector returns for just the second quarter of 2021, we saw that:
- (mentioned above)The Energy sector turned in another stellar quarter, driven by the price of oil jumping another $15;
- The Financials sector had another wonderful quarter, helped by the Federal Reserve’s stance of keeping rates low through at least 2023; and
- The differences between the best performing and worst performing sectors in the second quarter narrowed relative to the first quarter, as the Energy sector’s return was about 12x greater than the Utilities sector’s quarterly return.
Those ranges are the epitome of sector rotation. The numbers empirically identify the importance of asset allocation and diversification for all investors.
Red Hot Housing Market
Late in the month, the National Association of Realtors announced that existing-home sales decreased for a fourth straight month in May. Further, only one major U.S. region recorded a month-over-month increase, while the other three regions saw sales decline. However, each of the four areas again registered double-digit year-over-year gains, which is not surprising given the state of the real estate market and the economy in general this time last year.
According to the release from the NAR, total existing-home sales – completed transactions that include single-family homes, townhomes, condominiums and co-ops – dropped 0.9% from April to an annual rate of 5.80 million in May. But sales in total were up a stunning 44.6% from just one year ago (May 2020).
The NAR further reported that:
- The median existing-home price for all housing types in May was $350,300, up 23.6% from May 2020 ($283,500), as every region registered price increases.
- This is a record high and marks 111 straight months of year-over-year gains since March 2012.
- Total housing inventory at the end of May amounted to 1.23 million units, up 7.0% from April’s inventory and down 20.6% from one year ago (1.55 million).
- Unsold inventory sits at a 2.5-month supply at the present sales pace, marginally up from April’s 2.4-month supply but down from 4.6-months in May 2020.
- Properties typically remained on the market for 17 days in May, unchanged from April and down from 26 days in May 2020.
- Eighty-nine percent of the homes sold in May 2021 were on the market for less than a month.
Hoping for a Good Second Half
Optimistic investors are pointing out that the S&P 500 has only generated better first-6-month numbers 16 times since 1950.
Further, when the market has returned at least 12.5% in the first six months, its average return for the next six months was 9.7% – and it was positive in 12 out of those 16 years.
Although past performance is never a guarantee of future results, we can still hope that the trend continues.