2021 Halftime Report

2021 is officially half over, and if you are at a loss for how to describe it, you probably aren’t alone. In one sense, a lot has happened. The events of January 6, Brexit, the Suez blockage, meme stocks, Archegos’ collapse, cryptocurrencies’ wild ride, all things dogecoin, COVID’s delta variant, the Indian tragedy, new lockdowns in Australia, sabre-rattling in the Taiwan Strait and South China Sea, Middle Eastern conflict, you name it. But markets have told a different story, extending one of the longest quiet periods in recent memory. Day-to-day volatility is low. As many outlets have noted, stocks have now gone without a -5% drop since last autumn. That might be why headlines have hyped every little wiggle along the way to global stocks’ 13.1% first-half return, which illustrates the myopia plaguing the investment world right now.^[i]

As June closed, most outlets focused on the S&P 500 and other big indexes finishing the month at new record highs. That is a nice enough milestone, if not a dime a dozen in maturing bull markets. A more interesting development, in our view, didn’t receive anywhere near as much ink: Growth stocks trounced value, 10.9% to 4.7%.^[ii] Heck, since the value countertrend’s zenith on May 13, growth is up 9.3% while value just barely rounded to 0.1%.^[iii] Yet, strangely, most commentators act like value remains on some huge tear while growth is stuck at the starting line with a sprained ankle. Consider this as Exhibit 22,567,938 in the wealth of evidence that letting headlines drive your investment decisions isn’t a winning move. Sometimes they are myopic and sensationalized. Other times, they are dead wrong.

With growth leading in Q2, growth-heavy sectors did a lot of the heavy lifting. Tech was the best performer at 11.5%, bringing it in line with the world year to date.^[iv] Communication Services, home to many Tech-like firms, also outperformed at 9.2%.^[v] But Energy defied the trend, as oil market fundamentals outweighed stylistic factors. It kept outperforming and remains the market’s top sector year to date. We still think this is likely to prove fleeting, as the reopening demand pop will probably run out of steam sooner rather than later and producers worldwide still have plenty of spare capacity. Supply and demand will likely balance out before long, putting a lid on oil prices and cooling earnings growth for that sector. Markets will probably start pricing that soon, if they haven’t already, considering Energy’s margin of leadership was much, much narrower in Q2 than in Q1.

As for geographic trends, Canada’s high Energy weighting—and its heavily Energy-exposed Financials sector—boosted returns in Q2, helping it clock in at 10.0%.^[vi] The US wasn’t far behind at 8.9% (using the MSCI USA index, for consistency with all the other country and sector returns in this piece), helped a great deal by huge Tech and Tech-like stocks.^[vii] UK stocks slowed down, rising 6.0% in Q2, and are now trailing the world year to date by a bit.^[viii] Some may pin that on Brexit, but that ignores the country’s lockdowns lasting much longer than the rest of the Western world, which weighed on sentiment. Furthermore, the country’s heavy value tilt was a big Q2 headwind.

Q2’s main geographic weak spot was the Asia-Pacific region. New Zealand fell again, bringing year-to-date returns to a not-so-hot -15.2%.^[ix] Japan was slightly negative as its slow vaccination rollout and COVID flareups weighed on sentiment, while Singapore eked out 0.5% as its value orientation weighed and a fresh COVID outbreak upended its travel bubble with Hong Kong.^[x] The latter did a little better but still trailed global stocks badly, rising just 2.5% as investors continued grappling with mounting political uncertainty.^[xi]

Overall, we think Q2’s main theme is simple: Global stocks continue behaving as they normally would in a late-stage bull market, which we think makes sense. Last year’s downturn had a bear market’s magnitude and identifiable cause, but it had a correction’s duration. In our view, it didn’t last long enough to fully reset the market cycle, which is why growth has beaten value cumulatively since the recovery began in March 2020. That leadership has endured despite several head fakes along the way, and we think it will probably keep doing so through the rest of this bull market. Keep that in mind as headlines keep touting the proverbial next big thing in niche corners of the market or hot IPOs. Those are usually more value oriented and overhyped, with their allegedly hot stories probably priced in by the time you hear about them. In our view, this is a time to avoid that greedy temptation and stick with big boring growth stocks. We think their Q2 leadership is likely a down payment on more to come.