Defined Benefit
Defined Contribution
Insurance Assets
Nonprofit

Small Gains in U.S. Equities and Fixed Income, but Losses Globally

Small Gains in U.S. Equities and Fixed Income, but Losses Globally
clock
3 min 31 sec

U.S. Equity Up Modestly

The S&P 500 Index was up a modest 0.6% in 3Q21, with results mixed across sectors. Industrials (-4.2%) and Materials (-3.5%) were at the bottom of the pack while Financials (+2.7%) was the best-performing sector. Energy (+43%) is up the most YTD. In the large cap space, growth stocks outperformed value (Russell 1000 Growth: +1.2%; Russell 1000 Value: -0.8%) but lag YTD (+14.3% vs. +16.1%). In small caps, the reverse occurred (Russell 2000 Growth: -5.7%; Russell 2000 Value: -3.0%), and value is ahead YTD by more than 20 percentage points (Russell 2000 Growth: +2.8%; Russell 2000 Value: +22.9%) as “meme” stocks posted sharp gains. Small cap underperformed large cap in 3Q (Russell 2000: -4.4% vs. Russell 1000: +0.2%) and now lags YTD (12.4% vs. 15.2%).

Global Equity Falls

The MSCI ACWI ex-USA Index lost 3.0% for the quarter, hurt primarily by U.S. dollar strength and the benchmark’s exposure to emerging markets. The best-performing sector was Energy (+7%), while Consumer Discretionary (-11%) and Communication Services (-10%) posted steep declines. These sectors include some of the Chinese stocks that have been hit hard by the country’s regulatory crackdown (Alibaba, Tencent, and Baidu all fell more than 20%). The MSCI EAFE Index (Europe, Australia, and Far East) lost 0.4% but in local terms it was up 1.3%. Japan (+4.6%) performed relatively well while many of the larger constituents were down for the quarter.

Emerging Markets Plunge

The MSCI Emerging Markets Index sank 8.1%, making it the worst-performing asset class for the quarter. Within emerging markets, Brazil (-20%), China (-18%), and Korea (-13%) fell sharply while India (+13%), Russia (+10%), and Colombia (+10%) were up strongly.

Slight Gains for U.S. Fixed Income

U.S. Treasury yields were relatively unchanged from 6/30/21, masking intra-quarter volatility. The 10-year U.S. Treasury closed the quarter at 1.52%, up sharply from early August when it traded at 1.19%. The Bloomberg US Aggregate Bond Index returned 0.1% for the quarter. Investment grade corporates underperformed U.S. Treasuries by 15 bps on a duration-adjusted basis as spreads widened modestly. TIPS outperformed nominal Treasuries (Bloomberg US TIPS Index: +1.8%; Bloomberg US Treasury Index: +0.1%) and 10-year breakeven spreads widened 5 bps to 2.37%. The Bloomberg High Yield Index rose 0.9% and leveraged loans (S&P LSTA Lev Loan: +1.1%) also performed well. The high yield default rate declined to 0.9% in September, the lowest since March 2014, according to data from J.P. Morgan.

Tax-Exempts Underperform Treasuries

Municipals (Bloomberg Municipal Bond Index: -0.3%) underperformed Treasuries for the quarter though the supply/demand picture was positive. Supply was modest and demand was fueled by expectations for higher tax rates and strong credit fundamentals. Lower-quality bonds continued their trend of outperformance as investors sought yield. The BBB sector returned +0.1% vs. -0.4% for AAAs.

Strong Dollar Erodes Unhedged Returns

Overseas, developed market returns were muted and U.S. dollar strength eroded returns for unhedged U.S. investors. The Bloomberg Global Aggregate ex-US Bond Index fell 1.6% but was flat (+0.1%) on a hedged basis. The dollar gained roughly 2% vs. a basket of developed market currencies.

Losses for EM Debt

Emerging market debt posted negative returns; the JPM EMBI Global Diversified Index fell 0.7% and the local JPM GBI-EM Global Diversified Index lost 3.1%, most of which was due to currency depreciation. In local terms, this index was down only 0.2%. Latin America (-7.2%) was the worst-performing region within the index, with Brazil, Chile, and Peru declining more than 10%. Asia (+0.3%) performed best, led by China (+2%) and Indonesia (+4%).

Most Real Assets Sees Gains, Some Quite Big

The Bloomberg Commodity Index rose 6.6% for the quarter and is up 29.1% YTD, but what lies under the hood is more interesting. Natural gas prices soared nearly 60% for the quarter, and those gains were relatively muted compared to the experience in Europe, where prices tripled. WTI Crude Oil was up 4% and other broad sectors were relatively flat to down. TIPS (Bloomberg TIPS Index: +1.8%) performed well relative to nominal U.S. Treasuries. REITs posted more muted results, with the MSCI US REIT Index up 1.0%. Gold (S&P Gold Spot Price Index: -0.8%) and infrastructure (DJB Global Infrastructure: -0.9%) posted negative returns. Copper fell more than 4% on worries over slowing demand from China.

Posted by

Share
Share on facebook
Share on twitter
Share on linkedin
Related Posts
Public Markets

Global Stocks Rebound in 4Q; Fixed Income Suffers Dreadful Year

Kristin Bradbury
Kristin Bradbury analyzes global equity and fixed income markets in 4Q22 and for the full year.
Private Markets

Private Credit Sees Strong Demand as Rates Rise

Catherine Beard
Catherine Beard takes a look at the private credit landscape in 3Q22 and assesses the year so far.
Private Markets

Private Real Estate Gains, but REITs Fall; Commodities Also Dip

Munir Iman
Kristin Bradbury, Munir Iman, and Aaron Quach analyze real estate and real assets performance in 3Q22.
ESG

Green Financing in Residential Real Estate

Aaron Quach
Christine Mays and Aaron Quach explain green financing and how it can help investment managers obtain more favorable financing terms.
Public Markets

There Was Really No Place to Hide in World Markets

Kristin Bradbury
Kristin Bradbury analyzes global equities, fixed income, and real assets markets in 3Q22, where there really was no place to hide.
Private Markets

Private Real Estate Strong; REITs Lag Equities

Munir Iman
Private real estate performed well in 2Q22 while REITs lagged equities. Real assets saw widespread drops.
Private Markets

Private Credit Interest Still High Despite Illiquidity Premium Close to Zero

Catherine Beard
Catherine Beard analyzes the performance of private credit in 2Q22 and explains what is happening with its illiquidity premium.
Macro Trends

Bubbles Bursting Everywhere

Janet Becker-Wold
Janet Becker-Wold explains how recent bubbles inflated and what their popping means for institutional investors.
Public Markets

Few Bright Spots as Markets Continue to Drop

Kristin Bradbury
Kristin Bradbury recaps how the global markets performed in 2Q22.
Public Markets

Do Active Core Plus Fixed Income Managers Add Value With Sector Rotation?

Kevin Machiz
Kevin Machiz examines the added value of active core plus fixed income managers vs. a DIY portfolio.

Callan Family Office

You are now leaving Callan LLC’s website and going to Callan Family Office’s website. Callan Family Office is not affiliated with Callan LLC.  Callan LLC has licensed the Callan® trademark to Callan Family Office for use in providing investment advisory services to ultra-high net worth clients, family foundations, and endowments. Callan Family Office and Callan LLC are independent, unaffiliated investment advisory firms separately registered with the Securities and Exchange Commission under the Investment Advisers Act of 1940.

Callan LLC is not responsible for the services and content on Callan Family Office’s website. Inclusion of this link does not constitute or imply an endorsement, sponsorship, or recommendation by Callan LLC of their website, or its contents, and Callan LLC is not responsible or liable for your use of it. When visiting their website, you are subject to Callan Family Office’s terms of use and privacy policies.