Harbor Monthly Market Recap September 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

September marked the first monthly loss for the S&P 500 Index since January and the worst result for the index since March 2020. Inflation worries combined with the ongoing economic impact of the global pandemic put investors in a pessimistic mood. Selling was widespread, and few market segments escaped. Growth stocks lost more than value; value led growth over the one-year period but lagged over longer-term periods. Large caps fell more than small caps, but small caps remain ahead of large caps for the one-year trailing period. However, large caps lead over all long-term trailing periods. Only one sector was able to sidestep the selloff—energy stocks rallied thanks to rallying oil and natural gas prices. As for factors, size and profitability were notable underperformers. Investment quality, meanwhile, posted positive results for the month.

Developed International Equities

International markets also lost ground, but they did manage to outperform U.S. stocks. The MSCI EAFE Index fell almost 3% in September, led lower by European stocks. Performance patterns internationally were similar to the U.S.: growth stocks sold off more than value, and every sector but energy posted losses. However, unlike the U.S., small caps underperformed large caps. Japan equities was one bright spot in global markets in September, extending a rally that began in August. The move higher was sparked by re-opening hopes and on easing political concerns after it became clear that the ruling LDP party would remain in power. Beta led the factor performance charts, with residual volatility bringing up the rear.

Emerging Markets

Emerging Markets equities fell along with the rest of the globe. However, the MSCI EM Index’s loss was slightly less than the S&P 500’s. Growth fell further than value in Emerging Markets. Value has substantially outperformed growth over the one-year period, though growth still leads by wide margins over longer-term periods. Small caps continued to outpace large caps in September and remain meaningfully ahead over the 12-month period. That has helped small caps substantially narrow the long-term performance gap with large caps in Emerging Markets. Although China captured the headlines, Brazil was the biggest loser, notching its third straight monthly loss on concerns that President Bolsonaro might risk the country’s fiscal stability in order to boost his popularity ahead of the 2022 election. Given its large weight in the benchmark, China was the primary factor behind September’s poor result. Credit concerns about Evergrande, a Hong Kong real estate company, added to the list of worries that have plagued Chinese markets in 2021. On the positive note, Russian markets rallied, helped by strengthening oil prices. Momentum was a notable underperformer among factors. Meanwhile, value-oriented factors, book to price and dividend yield, outperformed.

Fixed Income

Market yields remain low by historical standards, but Treasury rates across the curve rose near the end of September as markets digested more hawkish comments from the U.S. Federal Open Markets Committee after its September 22 meeting. Yields on two-year, five-year, and 10-year U.S. Treasuries finished September and the third quarter higher, while the 30-year bond’s yield ended September higher than August month end (and only slightly lower than June 30). In all, the Bloomberg U.S. Treasury Index finished the quarter slightly higher, gaining 0.09%, after declining by -1.08% in September 2021.

Interest rate risk was much more in focus for the investment grade corporate bond market than credit risk, as COVID-19 cases, a driver of credit risk, have declined in recent weeks. Spreads for the Bloomberg U.S. Corporate Index changed little in Q3 2021, varying within 10 basis points from wide to tight. The benchmark’s return was flat for the quarter and -1.05% for the month of September.

Mortgage-backed securities typically stand out on a total return basis when rates rise as they are less sensitive to these changes and this was the case for the month and the quarter. Fed purchasing and home price appreciation continue to support the sector. The Bloomberg U.S. MBS Index gained 0.10% for the quarter and lost -0.36% in the quarter’s final month.

The Bloomberg U.S. Aggregate Bond Index, a benchmark incorporating U.S. government, corporate, and mortgage-backed securities, gained 0.05% for the quarter and lost -0.87% for September. Just less than two-thirds of U.S. Intermediate Core Plus mutual funds and ETFs outperformed the index for the quarter, while the benchmark outperformed 65% of Intermediate Core mutual funds and ETFs.

U.S. high yield held up well in the quarter and month, thanks to lower interest rate sensitivity than high quality bonds, an improving economic picture and, for segments of the market, rallying commodity prices. Spreads across ratings tiers were tighter on the month, and a bit wider on the quarter, due to the selloff in July. Among high yield sectors, Energy was a standout performer as oil and natural gas prices rallied, gaining 1.7% for the quarter and 1.2% for the month. The ICE BofA U.S. HY Index climbed 0.94% for Q3 and rose by 0.04% in September. The index ranked better than the median U.S. High Yield fund/ETF last month, and better than 80% of funds and ETFs for the quarter. Of note: high yield outperformed both higher quality sectors of the bond market and the S&P 500 for both the quarter and the month.

Convertibles posted weak performance relative to other fixed income areas in September, and that dragged down quarterly performance into the red as well. Growth sectors dominate the ICE BofA U.S. Convertibles ex Mandatory Index, and for the quarter, declines in the Telecom and Consumer Discretionary areas led to negative performance for the index. In September, the stumbles of not only these two areas, but Information Technology and Health Care as well, weighed down the index’s results. (IT alone makes up approximately 40% of the index and lost more than 2% in the month.) In all, the benchmark lost -0.79% for the third quarter of 2021 and -1.38% in September 2021. The silver lining: As expected for down periods, convertibles outperformed small- and mid-cap U.S. equities.

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.

The views expressed herein may not be reflective of current opinions, are subject to change without prior notice, and should not be considered investment advice.

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 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 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.