Our goal with this piece is to provide a recap and analysis of the major financial events that occurred during the Third Quarter of 2021, and to offer context for our market outlook.
US Equity Markets: The S&P 500 posted a gain of +0.6% in the third quarter, bringing the market higher by +15.9% for the year. The market reached a new all-time high on September 2nd, when the S&P 500 closed at 4,537. However, volatility increased from there as the S&P declined by -5% through the end of September. That ended the S&P 500’s streak of over two hundred trading days without a -5% pullback, which was one of the ten longest stretches since 1929.
US Fixed Income Markets: The Bloomberg Barclays US Aggregate Bond index (Agg), which acts as a proxy for the investment-grade bond market, increased by +0.1% in the quarter as the small move higher in interest rates did not have a major impact on returns (bond prices move inversely to interest rates). Other areas of the fixed income market produced mixed results, including, Corporates (0%), High Yield (+0.9%), and Munis (-0.3%).
10-Year Treasury Yield: The 10-Year Treasury yield increased by about 2 basis points in the quarter to end at 1.49%. The yield was mostly lower throughout the period before increasing by about +0.2% in the last six trading days of September. That yield increase was mainly driven by the Fed’s move toward tapering, the delta wave peaking, the spike in oil prices, and increased inflation expectations.
Inflation: The three latest Core PCE inflation readings (June, July, and August) increased by +3.6% Y/Y, well above the Fed’s target of about 2%. While Fed Chair Powell admitted that it is “frustrating to see bottlenecks and supply chain problems not getting better and holding longer than we thought”, he still believes the recent increase in inflation will be transitory. The latest FOMC projections show inflation ending the year at +3.7% before falling to +2.3% in 2022.
The Fed: Now that the economy is on the path to recovery and inflation pressures are rising, the Fed is starting to gradually move away from their ultra-accommodative monetary policy. The Fed will first by take their foot off the monetary policy gas pedal (tapering the quantitative easing program) before they hit the brake (raising interest rates). Our sense is that the Fed will begin tapering in November and conclude in mid-2022 before raising interest rates in late-2022. Overall, monetary policy will still be considered accommodative for at least the next year or two, but the level of support is decreasing.
Fiscal Stimulus: Congress is currently negotiating three major bills/issues: raising the debt ceiling, the $550 billion infrastructure package, and the $3.5 trillion budget reconciliation bill.
US Economy: The economy continues to perform well, although the pace of the recovery has recently slowed due to the delta variant. After declining by -3.4% in 2020, Real GDP is expected to increase by +6.0% in 2021 and +4.2% in 2022. If Real GDP reaches the current estimate this year, it would be the highest growth rate since 1984.
US Equity Market Outlook: The recent market performance (S&P 500: +97% since 3/23/20) has also been notable for the lack of volatility. Going forward, financial markets will begin to transition as we have reached peak levels of corporate earnings growth, economic growth, fiscal stimulus, and monetary stimulus. While the absolute levels will remain high, the growth rates will begin to decelerate as we move further away from the pandemic. Furthermore, we are monitoring several market risks, including, higher interest rates and inflation, the possibility that the Fed may tighten earlier than expected, the upcoming debt ceiling deadline, instability in China, and the potential for higher taxes. While we are pleasantly surprised at the stock market performance over the last eighteen months, we know that stocks do not move in a straight line forever and volatility is inevitable. We will continue to apply our time-tested investment process based on risk management, asset allocation, and security selection to utilize any volatility as an opportunity to reposition portfolios.
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November 19, 2021
Q3’2021 Market Review and Outlook
Our goal with this piece is to provide a recap and analysis of the major financial events that occurred during the Third Quarter of 2021, and to offer context for our market outlook.
US Equity Markets: The S&P 500 posted a gain of +0.6% in the third quarter, bringing the market higher by +15.9% for the year. The market reached a new all-time high on September 2nd, when the S&P 500 closed at 4,537. However, volatility increased from there as the S&P declined by -5% through the end of September. That ended the S&P 500’s streak of over two hundred trading days without a -5% pullback, which was one of the ten longest stretches since 1929.
US Fixed Income Markets: The Bloomberg Barclays US Aggregate Bond index (Agg), which acts as a proxy for the investment-grade bond market, increased by +0.1% in the quarter as the small move higher in interest rates did not have a major impact on returns (bond prices move inversely to interest rates). Other areas of the fixed income market produced mixed results, including, Corporates (0%), High Yield (+0.9%), and Munis (-0.3%).
10-Year Treasury Yield: The 10-Year Treasury yield increased by about 2 basis points in the quarter to end at 1.49%. The yield was mostly lower throughout the period before increasing by about +0.2% in the last six trading days of September. That yield increase was mainly driven by the Fed’s move toward tapering, the delta wave peaking, the spike in oil prices, and increased inflation expectations.
Inflation: The three latest Core PCE inflation readings (June, July, and August) increased by +3.6% Y/Y, well above the Fed’s target of about 2%. While Fed Chair Powell admitted that it is “frustrating to see bottlenecks and supply chain problems not getting better and holding longer than we thought”, he still believes the recent increase in inflation will be transitory. The latest FOMC projections show inflation ending the year at +3.7% before falling to +2.3% in 2022.
The Fed: Now that the economy is on the path to recovery and inflation pressures are rising, the Fed is starting to gradually move away from their ultra-accommodative monetary policy. The Fed will first by take their foot off the monetary policy gas pedal (tapering the quantitative easing program) before they hit the brake (raising interest rates). Our sense is that the Fed will begin tapering in November and conclude in mid-2022 before raising interest rates in late-2022. Overall, monetary policy will still be considered accommodative for at least the next year or two, but the level of support is decreasing.
Fiscal Stimulus: Congress is currently negotiating three major bills/issues: raising the debt ceiling, the $550 billion infrastructure package, and the $3.5 trillion budget reconciliation bill.
US Economy: The economy continues to perform well, although the pace of the recovery has recently slowed due to the delta variant. After declining by -3.4% in 2020, Real GDP is expected to increase by +6.0% in 2021 and +4.2% in 2022. If Real GDP reaches the current estimate this year, it would be the highest growth rate since 1984.
US Equity Market Outlook: The recent market performance (S&P 500: +97% since 3/23/20) has also been notable for the lack of volatility. Going forward, financial markets will begin to transition as we have reached peak levels of corporate earnings growth, economic growth, fiscal stimulus, and monetary stimulus. While the absolute levels will remain high, the growth rates will begin to decelerate as we move further away from the pandemic. Furthermore, we are monitoring several market risks, including, higher interest rates and inflation, the possibility that the Fed may tighten earlier than expected, the upcoming debt ceiling deadline, instability in China, and the potential for higher taxes. While we are pleasantly surprised at the stock market performance over the last eighteen months, we know that stocks do not move in a straight line forever and volatility is inevitable. We will continue to apply our time-tested investment process based on risk management, asset allocation, and security selection to utilize any volatility as an opportunity to reposition portfolios.
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