With Q3 2021 ending in 4 days, today we will take an advance look at what worked and didn’t in the third quarter and how asset price returns are shaping up for the year.
First up, global/regional/notable country equity price returns (data through Friday’s close, ETF symbol noted, bolding for emphasis):
- MSCI All-World Index (ACWI): +1.7 pct QTD, +13.5 pct YTD
- MSCI All-World ex-US (ACWX): -1.5 pct QTD, +6.8 pct YTD
- S&P 500 (SPY, IVV): +3.7 pct QTD, +18.6 pct YTD
- Russell 2000 (IWM): -2.8 pct QTD, +13.8 pct YTD
- MSCI EAFE (non-US developed economies) Index (EFA): +1.8 pct QTD, +10.1 pct YTD
- MSCI Emerging Markets (EEM): -7.9 pct QTD, -1.7 pct YTD
- MSCI Japan (EWJ): +7.6 pct QTD, +7.6 pct YTD
- MSCI United Kingdom (EWU): -0.4 pct QTD, +11.2 pct YTD
- MSCI France (EWQ): -0.9 pct QTD, +15.5 pct YTD
- MSCI Switzerland (EWL): -1.0 pct QTD, +7.8 pct YTD
- MSCI Germany (EWG): -1.8 pct QTD, +6.9 pct YTD
- MSCI China (MCHI): -19.2 pct QTD, -17.7 pct YTD
- MSCI Taiwan (EWT): +0.1 pct QTD, +20.5 pct YTD
- MSCI South Korea (EWY): -11.5 pct QTD, -4.1 pct YTD
- MSCI India (INDA): +12.8 pct QTD, +24.1 pct YTD
Comment (1): Q3 was yet another quarter where US large caps (S&P 500) were the must-own global equity asset group. They beat everything on the list above except Japan (which had been flat on the year going into Q3) and India (which seems to be well on its way to becoming the country investors go to replace Chinese equity exposure). This confirms what we often say in these notes: the S&P 500 is the best place to put global equity capital, both because of its heavy overweight in market-leading Tech companies and due to the American industry’s ability to adapt to challenges and continue to grow.
Comment (2): Our non-US equity picks continue to be UK stocks (best of the rest for EAFE stocks in Q3 ex-Japan) and any EM equity market except China.
Next up we have fixed income and commodities (just price returns, not total returns):
- US 7–10-year Treasuries (IEF): +0.2 pct QTD, -3.5 pct YTD
- US +20-year Treasuries (TLT): +1.8 pct QTD, -6.9 pct YTD
- US Investment Grade Corporates (LQD): +0.4 pct QTD, -2.3 pct YTD
- US High Yield Corporates (HYG): -0.2 pct QTD, +0.7 pct YTD
- Non-US Developed Economy Sovereign Debt (IGOV): -0.6 pct QTD, -6.7 pct YTD
- Emerging Market Debt (EMB): -1.4 pct QTD, -4.3 pct YTD
- Gold (GLD): -1.4 pct QTD, -8.4 pct YTD
- Silver (SLV): -14.5 pct QTD, -15.7 pct YTD
- Oil: +0.7 pct QTD, +52.5 pct YTD
Comment (1): we’re as surprised as you might be that +20-year Treasuries are up for the Q3-to-date, but that’s a good reminder that long-dated yields spent most of the quarter below their Q2 close of just over 2 percent. They have been spiking in the last week, so by the time we get to Thursday’s actual Q3 close this will likely change.
Comment (2): we remain positive on US HY corporates as a yield play and also believe oil will continue to rally.
Finally, US large cap sectors:
Outperformers thus far in Q3
- Technology: +6.1 pct QTD, +20.5 pct YTD
- Health Care: +4.8 pct QTD, +16.3 pct YTD
- Financials: +4.2 pct QTD, +29.7 pct YTD
Underperformers thus far in Q3:
- Consumer Discretionary: +3.6 pct QTD, +15.0 pct YTD
- Real Estate: +3.6 pct QTD, +25.6 pct YTD
- Utilities: +3.0 pct QTD, +3.9 pct YTD
- Communication Services: +1.8 pct QTD, +22.2 pct YTD
- Consumer Staples: +0.9 pct QTD, +4.7 pct YTD
- Industrials: -1.5 pct QTD, +13.9 pct YTD
- Materials: -1.5 pct QTD, +12.0 pct YTD
- Energy: -5.5 pct QTD, +34.3 pct YTD
Comment (1): Q3 showed why you need to be at least even-weight large cap Tech (our longstanding recommendation), which clearly benefited this quarter from worries about a US/global economic slowdown due the spread of the delta variant of the pandemic. The other point of interest in the above data is that US large cap sector leadership has been quite thin in Q3. Just 3 industries (Tech, Health Care and Financials) have outperformed, and it is those groups that put US large caps into the lead in terms of global equity returns this quarter.
Comment (2): we’ll do more on this in the week ahead, but our favorite large cap groups remain (in order of preference) Energy, Financials, Health Care, and Industrials. We would avoid defensive groups like Consumer Staples and Utilities. Note that even in a quarter punctuated by economic uncertainty they have not outperformed.