Harbor Monthly Market Recap August 2021

As part of our commitment to excellent due diligence, Harbor takes an active approach to evaluating the market landscape against our expectations and our manager performance results. In the latest monthly market recap, we share our observations across asset classes and factors.

Equities

August saw new record highs in U.S. equity markets, with the S&P 500 (+3.04%) grinding upward as business fundamentals continued to stay healthy, global developed markets continued lifting pandemic-induced restrictions, and interest rates remained low. Investors maintained their optimism despite widespread concerns regarding inflation, the Delta variant, peak economic growth, as well as supply-chain and labor constraints.

Large caps outperformed small capitalization stocks during the month, a trend which continues YTD. The Russell 1000 Index outpaced the Russell 2000 Index by 65 bps in August and delivered +20.74% YTD vs. +15.83% for its small cap counterpart.

From a style perspective, large cap growth outpaced large cap value by 159 bps while small cap value outpaced small cap growth by 86 bps in August. Large growth companies now lead large value companies since the onset of 2021, a reversal that can be attributed to the spreading Delta variant and slight pause in the “reopening trade” favoring value and cyclical stocks. Despite the aforementioned, volatility (as measured by the CBOE Market Volatility Index) subsided 11% during the same period.

From a sector perspective, the best performing U.S. sector was financials (+5.09%), meanwhile energy lagged (-1.92%). All sectors delivered positive absolute returns in August, with the exception of energy; that said, it is the top performing sector YTD at +31.92%, closely followed by financials at +30.73%.

Looking through a factor lens, momentum, beta, and earnings quality led U.S. equity performance while growth and leverage lagged in August.

Global equities, as measured by the MSCI ACWI Index, delivered total returns of +2.50% in August and +15.91% YTD, lagging U.S. equities (as measured by the Russell 3000 Index) by nearly 450 bps in 2021. Digging deeper into global markets, growth handily bested value (+3.21% vs. +1.76%, respectively) while large caps gained +2.48%, outpacing small caps by 20 bps. Similarly, international stocks gained +1.76% as measured by the MSCI EAFE Index, with growth besting value yet small caps outperforming their large cap counterparts.

Although emerging markets stocks were negatively impacted by Chinese regulators’ recent policy interventions as well as rising virus concerns, the MSCI Emerging Markets Index delivered +2.62% for the month. Large companies once again bested small caps, while EM value slightly outperformed EM growth. South Korean and Chinese markets delivered negative returns during the period.

Fixed Income

Fixed income investors focused on the Federal Reserve Chair’s Jackson Hole speech and tapering timeline. Jerome Powell restated that the Fed will remain as patient as possible given transitory inflationary pressures. The Fed also reemphasized its 2% inflation growth objective, noting that tapering may begin before year end as "substantial further progress" on inflation measures has been met while there has also been “clear progress” on maximum employment. Chair Powell also stressed that the timing and pace of tapering asset purchases will not be intended to be direct signals regarding the timing of interest rate hikes. Against this backdrop, fixed income performance has been rather lackluster.

The 10-year Treasury yield rose 7 bps during the month, to 1.30%. Treasury yields increased across the yield curve, with the largest increases in the belly of the curve. The Bloomberg Barclays US Aggregate Index delivered -0.19% in August.

Credit sectors saw investment grade corporate spreads be range bound, ending August 1 bp wider at 82 bps yet still near historical tights. The rise in yields coupled with a longer duration (over 8 years) for IG corporates led to a return of -0.3%. Despite heightened issuance (over $34 billion) in August, high yield spreads tightened 6 bps to 288 bps; risk appetite and a rebound in oil prices led high yield bonds to deliver +0.55%.

Securitized sectors largely outperformed corporate credit but still delivered negative absolute returns given taper concerns. Contrarily, USD-denominated emerging markets debt delivered +0.98%, in tandem with risk on appetite and the global reopening theme.

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Legal Notices & Disclosures

The information provided in this presentation should not be considered as a recommendation to purchase or sell a particular security. The weightings, holdings, industries, sectors, and countries mentioned may change at any time and may not represent current or future investments.

Past performance is no guarantee of future results.

The information shown relates to the past. Past performance is not a guide to the future. The value of an investment can go down as well as up. Investing involves risks including loss of principal.

The CBOE Volatility Index, or VIX, is a real-time market index representing the market's expectations for volatility over the coming 30 days.

The Russell 1000® Index is an unmanaged index generally representative of the large-cap segment of the U.S. equity universe. This unmanaged index does not reflect fees and expenses and is not available for direct investment.

The Russell 2000® Index is an unmanaged index generally representative of the small-cap segment of the U.S. equity universe. This unmanaged index does not reflect fees and expenses and is not available for direct investment.

The S&P 500 Index is an unmanaged index generally representative of the U.S. market for large capitalization equities. This unmanaged index does not reflect fees and expenses and is not available for direct investment.

The MSCI All Country World Index (ND) is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets. This unmanaged index does not reflect fees and expenses and is not available for direct investment.

The MSCI EAFE Index is an unmanaged index generally representative of major overseas stock markets. This unmanaged index does not reflect fees and expenses and is not available for direct investment.

Investing entails risks and there can be no assurance that any investment will achieve profits or avoid incurring losses.

Harbor Capital Advisors, Inc.