Market Commentary


Monthly Financial Markets Commentary — September 1, 2021

Stocks and bonds advanced broadly in the month of August, although gains were mainly in growth as opposed to value stocks. Investors appear to be largely unconcerned with inflation, buying the Fed's argument that it is a temporary phenomenon.

For 2021 the S&P 500 Index, the capitalization-weighted broadest measure of U.S. stock market performance, has returned 17.38%. The Nasdaq Composite Index, another capitalization-weighted index, but more reflective of growth stocks, has returned 18.81%. Finally, the Dow Jones Industrial Average, a price-weighted index, has returned 17.38%. All returns include dividends. Investors have returned to FANG and other glamour stocks in droves, despite the fact that these stocks already have very high valuations. The Fed continues to purchase massive amounts of U.S. government bonds, effectively monetizing more that half of the current federal deficit. This is despite the fact that the economy is roaring back to life and inflation is very robust.

The Barclay's U.S. Aggregate Bond Index, a broad measure of the U.S. bond market, has returned -.76% year to date. The 10-Year Treasury Note, the so-called "risk-free" rate, jumped to over 1.75% earlier in the year but has since fallen modestly to around 1.21%. This leaves the 10-Year Note with a solidly negative real rate of return, begging the question of why anyone in their right mind would invest in it. The answer appears to be that there are no other options for higher returns in the fixed income space, as every other central bank is pursuing a similar policy of money printing. While most individual investors may prefer stocks to bonds, many institutions, such as banks and insurance companies, are forced to invest in fixed income.

The sectors in the equity market that have performed the best in 2021 are Energy, Real Estate and Financials at 27.9%, 28.3% and 29.0%, respectively. Utilities, Consumer Staples, Communication Services have fared the worst at 9.1%, 7.6% and -3.5%, respectively. The concentration of the major averages in a very select group of high-tech and other favored stocks is a troubling sign.

The comparison of current price/earnings ratios and dividend yields as of September 1, 2021 to those of the prior year is as follows.

Index

Current*

Prior Year*

S&P 500

Price/Earnings

31.26

36.19

Dividend Yield (%)

1.31

1.75

Dow Jones Industrial Average

Price/Earnings

24.04

28.12

Dividend Yield (%)

1.78

2.14

* based on 12-month trailing data

The dividend yield on the S&P 500 has reached the lowest level since the dot-com bubble of 2000, and is one of the best measures of value, since it is a statistic that cannot be manipulated by management.

Current national average CD deposit yields for one-year, two-year and three-year instruments are .65%, .75% and .85%, respectively, rendering this traditional class of investments virtually un-investible.

Gold and crude oil most recently traded at $1,815.25 and $69.50, respectively, compared to $1,948.25 and $41.50 one year earlier. Crude oil has traded sideways to down in recent months due to concerns over the strength in the economy in the face of Covid-19 variants and increases in supply from OPEC.