The second quarter ended on June 30. For most investors it has been a solid one. This week 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.
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.
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
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:
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 benefited 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), then 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.
This article first appeared on June 30 on the Traders’ Insight blog.
Photo Credit: Tom Britt via Flickr Creative Commons
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