Three “Data” items today:
#1: With just one day left to go in the third quarter, today we will look at how various investment styles performed in Q3 2021 as well as how they are faring for the year-to-date. First, here are the current QTD and YTD price returns for the broad US equity benchmarks:
- S&P 500: +1.4 pct Q3-to-date, +16.1 pct YTD
- Russell 2000: -3.7 pct Q3-to-date, +12.7 pct YTD
Now, here is how US large cap Growth/Value have performed:
- S&P 500 Growth: +2.5 pct Q3-to-date, +16.8 pct YTD
- S&P 500 Value: +0.2 pct Q3-to-date, +15.5 pct YTD
Comment: even though large cap Growth has been rolling over in the last few weeks, it is still besting Value by a wide margin for Q3 and remains modestly ahead YTD. Not what you’d expect to see in a year of economic recovery, but those are the numbers.
And here is how US small cap Growth/Value has worked out:
- Russell 2000 Growth: -5.0 pct Q3-to-date, +3.3 pct YTD
- Russell 2000 Value: -2.3 pct Q3-to-date, +22.9 pct YTD
Comment: the Q3 Growth vs. Value performance story for US small caps is exactly the opposite of large caps – value did better. Why? Sector allocations, mostly. Russell 2000 Value has a 26 percent weighting in Financials versus just a 5 pct weight in Russell 2000 Growth, and small cap Financials were up modestly in Q3 (+1.3 pct).
Moving on, here is how several large ESG-focused US equity ETFs performed in Q3 and for the YTD:
- ESGU (iShares ESG Aware MSCI USA): +1.1 pct Q3-to-date, +15.7 pct YTD
- ESGV (Vanguard ESG US Stock): +1.2 pct Q3-to-date, +15.3 pct YTD
- SUSL (iShares MSCI USA ESG Select): +1.8 pct Q3-to-date, +17.6 pct YTD
- DSI (iShares MSCI KLD 400 Social): +1.7 pct Q3-to-date, +17.7 pct YTD
- Average: +1.5 pct Q3-to-date, +16.7 pct YTD
- ESML (iShares ESG Aware MSCI US Small Cap): -2.2 pct Q3-to-date, +15.9 pct YTD
Comment: US equity ESG investing held its own in Q3 2021, at least in large caps, and both small and large cap ESG are outperforming the S&P 500/Russell YTD. Parsing out how much of this differential is truly related to ESG issues is beyond the scope of this note. But the data speaks for itself in terms of the attractiveness of this approach: it is working in 2021, and certainly well enough to continue to draw fresh capital to the space.
#2: US mutual/exchange traded fund investors, typically retail and smaller institutions, remain a fickle lot when it comes to marginal US equity allocations. The latest money flow data from the Investment Company Institute was out today for the week ending September 22, and it shows that:
- After adding $19.6 billion to US equity products for the week ending 9/15, just after the S&P 500’s all-time high on 9/2, they turned around and sold $15.5 bn in the next week. These were the largest inflows/outflows for the last 3 months, so the about-face is notable. No doubt the drop in US equities during the September 22nd week played a role in their sudden loss of conviction.
- Interestingly, fund investors have continued to steadily add to their holdings of non-US equity funds ($2 – $ 4 bn/week) even though volatility here has been just as pronounced as domestic stocks.
- Their purchases of fixed income products continues at a steady tempo. These have been running at a fairly consistent $10-$15 bn weekly pace for months. Last week’s inflows totaled $13.1 bn.
- Commodity funds, mostly invested in physical gold, continue to show modest redemptions with last week at $46 million of outflows.
Takeaway: it is notable that US equity fund flows have shown themselves to be so closely tied to weekly stock market volatility this month. This tells us that, at the margin, this cohort is chasing performance (positive flows for the week after the early September top) but easily shaken out (redemptions when stocks declined the following week). One more reason, we believe, to be cautious on markets over the next few weeks. Unlike single-stock retail traders, who are buying dips, the demographic cohort that owns funds is selling them.
#3: US office occupancy rates remain quite low even as we get further past the end of Summer 2021 vacation season. There were improvements last week in occupancy for Houston, Austin, and San Francisco. The other 7 cities in office security pass company Kastle Systems’ Back to Work Barometer actually saw modest declines, as shown in the table below. Some of this may be due to the Yom Kippur holiday (September 16th), especially here in New York City. Still, if “return to the office” were a significant trend we suspect that occupancy rates could still have managed to increase. But they did not…
This chart, also from Kastle, shows just how slowly return-to-office is going. From +90 percent occupancy pre-pandemic, we are still at just 34 percent today and only slowly creeping higher. Moreover, exclude the Texas market and it is still below 30 percent.
Takeaway: this is not a good story for US urban unemployment, which remains the thorniest issue for domestic labor markets. Work from home is still clearly the default choice for millions of office workers. This limits job growth in cities since the many ancillary services these individuals used pre-pandemic are not currently as much in demand. We won’t get September’s Jobs Report for another 10 days, but just based on the Kastle data it is hard to see it surprising to the upside.
ICI Money Flows: https://www.ici.org/research/stats/weekly-combined
Kastle Systems data: https://www.kastle.com/safety-wellness/getting-america-back-to-work/