Harbor Monthly Market Recap October 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 monthly market recap, we share our observations across asset classes and factors.

U.S. Equities

While September marked the first monthly loss (-4.7%) for the S&P 500 Index since January, October delivered the best month of 2021 (+7.0%). This brings the index’s YTD return to over 24.0%. U.S. stocks continued to trend higher in October, hitting all-time highs as earnings season kicked off. Risk appetite and market optimism steadily increased throughout the month, following positive earnings surprises (over 80% beat rate), increased COVID-19 vaccinations, a range bound 10-year Treasury yield, as well as a perceived compromise on fiscal spending in Washington.

All 11 GICS sectors registered gains in October, led by Consumer Discretionary (+10.9%) and Energy (+10.4%). Oil prices continue to trend to a 7-year high as demand for consumption outweighed supply.

From a style perspective, large cap growth stocks once again outpaced their value counterparts. While value stocks continue to lead over the one-year trailing period (largely comprising the strong pandemic recovery), they lag over the longer term.

Smaller cap stocks also rebounded, delivering +4.25%. Small caps (in particular, small cap value) have outpaced large caps over the last twelve months, although the latter lead over longer term trailing periods.

As it pertains to factor returns, momentum and profitability were notable outperformers. Long term reversal effects, meanwhile, delivered negative returns for the month.

Developed International Equities

International stocks also delivered positive returns in October, but lagged U.S. equities. Performance patterns internationally were similar to the U.S. – growth stocks bested their value counterparts.

From a sector perspective, Communication Services companies were the monthly laggards (the only sectors to deliver a negative absolute return) while Utilities led (+~6%).

Small and mid-caps lagged larger capitalization stocks during the month, although they are nearly in line YTD, with both delivering double digit returns. Over longer-term trailing periods, small caps lead.

From a developed country perspective, all but Japan delivered positive returns. The Japanese yen declined vs. the U.S. dollar; Japanese consumers and retailers were also affected by rising energy costs.

Factor performance was led by momentum and beta, while long term reversal, liquidity factors, and dividend yield detracted.

Emerging Markets Equity

Emerging Markets (EM) equities rebounded with the rest of global equities, albeit to a much lesser extent; they lagged U.S. equities by nearly 600 basis points. Latin America was a particular laggard during the period, led by Brazil and Chile. On a positive note, Chinese equities rebounded, up over 3%.

EM growth bested EM value during the month, although the former remains in negative territory over the YTD period (compared to +4.8% for EM value). EM value leads one-year trailing returns as well, largely buoyed by the lack of exposure to underperforming, relatively expensive Chinese companies.

Small caps trailed large caps in October but remain meaningfully ahead over the one-year trailing period.

Among factors, notable outperformers include beta. Meanwhile, long-term reversal effects underperformed.

Fixed Income

Though market yields remain low by historical standards, the yield curve flattened in October. Two-year Treasury yields rose to 48 basis points while 10-year yields rose at a more moderate pace, ending at 1.55%. Contrarily, 30-year yields fell vs. the end of September, signaling investors’ concerns over rising inflation, the anticipation of a hawkish change to Fed policy during the November 3rd meeting, and thus cooling prospects for long term growth. In all, the Bloomberg U.S. Government Index finished the month slightly lower, declining 0.08%. Contrarily, the Bloomberg U.S. Government Long Index gained 1.84% in October. The Bloomberg U.S. Aggregate Bond Index, a benchmark incorporating U.S. government, corporate, and mortgage-backed securities, was flat in October.

Interest rate risk was much more in focus for the investment grade corporate bond market than credit risk; COVID-19 cases, a driver of credit risk, have declined in recent weeks. Returns varied for the month, delivering 1.50% for long corporates yet -0.55% for intermediate-duration credit. Spreads were relatively flat to a few basis points higher vs. September end. October also saw heavy supply (at over $115 billion in issuance), but demand remained healthy amid strong company fundamentals.

While Fed monthly purchases and home price appreciation continue to support the sector, the Bloomberg U.S. MBS Index lost -0.19% in October. Similarly, securitized products such as CMBS and ABS also delivered negative returns.

While U.S. high yield held up well in Q3 and September, thanks to lower interest rate sensitivity (duration) than high quality bonds, an improving economic picture and, for segments of the market, rallying commodity prices, October returns were negative. The ICE BofA U.S. High Yield Index delivered -0.19%. All credit quality buckets delivered negative performance, led by Caa-rated bonds.

U.S. convertibles posted strong performance relative to other fixed income sectors in October, delivering over 3.3% as growth sectors (IT in particular) dominate the ICE BofA U.S. Convertibles ex Mandatory Index.

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.

© [2021] Morningstar, Inc. All rights reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate,  complete, or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results.

Past performance is no guarantee of future results.

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

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 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.

The MSCI Emerging Markets Index is a market capitalization weighted index of equity securities in more than 20 emerging market economies. This unmanaged index does not reflect fees and expenses and is not available for direct investment.

The Bloomberg US Government Bond Index is an unmanaged index comprised of the US Treasury and US Agency Indices. The index includes US dollar denominated, fixed-rate, nominal US Treasuries and US agency debentures (securities issued by US government owned or government sponsored entities, and debt explicitly guaranteed by the US government). This unmanaged index does not reflect fees and expenses and is not available for direct investment.

The Bloomberg US Long Treasury Index is an unmanaged index that measures the performance of US dollar-denominated, fixed-rate, nominal debt issued by the US Treasury with a maturity greater than 10 years. STRIPS are excluded from the index because their inclusion would result in double-counting. This unmanaged index does not reflect fees and expenses and is not available for direct investment.

The Bloomberg US Aggregate Bond Index is an unmanaged index of investment-grade fixed-rate debt issues with maturities of at least one year. This unmanaged index does not reflect fees and expenses and is not available for direct investment.

The Bloomberg US Corporate Bond Index measures the investment grade, fixed-rate, taxable corporate bond market. It includes USD-denominated securities publicly issued by US and non-US industrial, utility and financial issuers. This unmanaged index does not reflect fees and expenses and is not available for direct investment.

The Bloomberg US Mortgage Backed Securities (MBS) Index tracks fixed-rate agency mortgage backed pass-through securities guaranteed by Ginnie Mae (GNMA), Fannie Mae (FNMA), and Freddie Mac (FHLMC). This unmanaged index does not reflect fees and expenses and is not available for direct investment.

The ICE BofA US Non-Distressed High Yield Index is a subset of the ICE BofA US High Yield Index (H0A0) including all securities with an option-adjusted spread less than 1,000 basis points. The ICE BofAML US High Yield Index (H0A0) is an unmanaged index that tracks the performance of below investment grade U.S. Dollar-denominated corporate bonds publicly issued in the U.S. domestic market. All bonds are U.S. Dollar-denominated and rated Split BBB and below. These unmanaged indices do not reflect fees and expenses and are not available for direct investment.

The ICE BofA US Convertible Ex Mandatory Index is broadly representative of the U.S. convertible securities market, consisting of publicly traded issues, denominated in U.S. Dollars, of all credit qualities, and excluding mandatory (equity-linked) convertibles. 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.