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Little Swoon This June

By:

Chief Strategist at Interactive Brokers

The second quarter ends today.  For most investors it has been a solid one.  Today seems like an opportune time to revisit the performance of key financial indicators over the past month and quarter.  One of the best ways to do that is to take a look at the normalized performances of key indices. We will do that in some graphs below.

Normalized Performances for June 2021 of S&P 500 Index (SPX, white), NASDAQ 100 (NDX, dark blue), Russell 2000 Index (RTY, magenta), Dow Jones Industrials (INDU, purple), and SPDR Gold Shares (GLD, light blue)

Normalized Performances for June 2021 of S&P 500 Index (SPX, white), NASDAQ 100 (NDX, dark blue), Russell 2000 Index (RTY, magenta), Dow Jones Industrials (INDU, purple), and SPDR Gold Shares (GLD, light blue)

Source: Bloomberg

We can see that NDX was the clear winner.  Investors have been rotating back into the NASDAQ mega-caps for the past month, which has driven significant outperformance to those who were early in that move.  The performance of those stocks has helped SPX to a modest gain, and consequently left RTY and INDU as underperformers.  Also, despite the incessant inflation talk, gold has sagged significantly.

Normalized Performances for Q2 2021 of S&P 500 Index (white), NASDAQ 100 (dark blue), Russell 2000 Index (magenta), Dow Jones Industrials (purple), and SPDR Gold Shares (light blue)

Normalized Performances for Q2 2021 of S&P 500 Index (white), NASDAQ 100 (dark blue), Russell 2000 Index (magenta), Dow Jones Industrials (purple), and SPDR Gold Shares (light blue)

Source: Bloomberg

When we look at the same graph for the full second quarter, we see that everything was a winner.  The leadership remains with NDX and SPX, but TRY and GLD also show as winners for the quarter.  The takeaway here is that the continuation of monetary and fiscal stimulus were clearly beneficial to a wide range of asset classes.

Much of the gain in NDX was attributed to the reduction in bond yields that we saw this quarter.  Bear in mind that 10-year Treasury note yields peaked at the end of last quarter, as bond investors seemed to race to the exits ahead of growing inflation fears.  At the time, NDX mega-caps suffered because of valuation fears.  Remember that most stock valuation methods utilize the present value of future earnings and/or cash flows.  The higher the interest rate, the lower the present value (and vice versa).  Some might question whether investors were truly concerned about equity valuations that were already sky-high by historical measures, but the rebound in bond prices (lower yields) gave investors a rationale to place even higher valuations on those market leaders.

Normalized Performances for June 2021 of S&P 500 Index (white), NASDAQ 100 (dark blue), 10 Year Treasury Note (CT10, magenta)

Normalized Performances for June 2021 of S&P 500 Index (white), NASDAQ 100 (dark blue), 10 Year Treasury Note (CT10, magenta)

Source: Bloomberg

Finally I would be remiss if I failed to point out the moves in the largest cryptocurrency, bitcoin.  The performance this quarter is truly staggering.  After a pop to fresh highs in April, bitcoin sank steadily and has lost over 1/3 of its value this quarter:

Normalized Performances for Q2 2021 of S&P 500 Index (white), NASDAQ 100 (dark blue), Bitcoin (XBTUSD, yellow), SPDR Gold (light blue)

Normalized Performances for Q2 2021 of S&P 500 Index (white), NASDAQ 100 (dark blue), Bitcoin (XBTUSD, yellow), SPDR Gold (light blue)

Source: Bloomberg

To be fair, bitcoin is still higher year-to-date, but my fear is that many individual investors participated during the run-up in the first quarter and are feeling some pain during the second.

If there is a lesson to be learned from the second quarter, it is that investors benefitted once again from the effects of the last fiscal stimulus package and ongoing monetary stimulus.  If the Federal Reserve stays on course with its bond purchases and monetary expansion, and the proposed infrastructure deal makes progress to becoming law, then investors are likely to continue with strategies that have worked well for months.  If there are stumbles in Congress, or if the Fed’s migration from thinking about talking about tapering to talking about tapering to actually putting out feelers about tapering (or more), than a change in plans might be in order.  The third quarter brings us the Fed’s Jackson Hole conference in late August, where changes in monetary outlook are often signaled, and yet another impending fight over the federal debt ceiling which could occur anytime in the next couple of months.  Things generally went well this quarter, but that doesn’t mean that investors should assume that it will continue unabated for the coming quarter.

Disclosure: Interactive Brokers

The analysis in this material is provided for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IBKR to buy, sell or hold such investments. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

Disclosure: Forex

There is a substantial risk of loss in foreign exchange trading. The settlement date of foreign exchange trades can vary due to time zone differences and bank holidays. When trading across foreign exchange markets, this may necessitate borrowing funds to settle foreign exchange trades. The interest rate on borrowed funds must be considered when computing the cost of trades across multiple markets.

Disclosure: Bitcoin Futures

Trading in Bitcoin futures is especially risky and is only for clients with a high risk tolerance and the financial ability to sustain losses. More information about the risk of trading bitcoin products can be found on the IBKR website.If you’re new to bitcoin, or futures in general please visit CME Bitcoin Futures.

PLEASE NOTE AT THIS TIME INTERACTIVE BROKERS PROVIDES LIMITED ACCESS TO CRYPTO-RELATED PRODUCTS. ELIGIBILITY TO TRADE IN CRYPTO-RELATED PRODUCTS MAY VARY BASED ON JURISIDICTION.  TRADING IN CRYPTO-RELATED PRODUCTS IS ESPECIALLY RISKY AND IS ONLY FOR CLIENTS WITH A HIGH RISK TOLERANCE AND THE FINANCIAL ABILITY TO SUSTAIN LOSSES.

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