News & Insights
Third Quarter 2021 Commentary
Investments and the Economy
The US economy posted slowing but above-average growth in the quarter underpinned by accommodative monetary policy and the historic fiscal stimulus that continues to work its way through the economic system. We are now over 20 months from the start of the pandemic and although the lockdowns that defined the earliest phase have essentially ended, there remain supply chain disruptions which have caused bottlenecks for the delivery of many goods leading to inflationary pressures. The employment
picture also improved during the quarter but at a much slower pace than was expected. To date, employment levels remain well below pre-pandemic levels.
After seeing strong consistent positive monthly returns since the market lows of March, stocks finally encountered some headwinds late in the third quarter driven largely by fears of heightened inflation and rising bond yields. For the quarter, the S&P 500 still managed to produce a positive return of +0.58% which brings the YTD return to +15.92%. Smaller market cap stocks as measured by the Russell 2000 returned a -4.36% QTD but remains positive for the year, +12.41%.
International equities were mixed for the quarter. Developed countries generally performed in line with U.S. equities. The MSCI EAFE which is an index of developed market companies was down -0.45% for the quarter and +8.35% year to date. The real story abroad has been emerging markets, especially China. In August, China announced a regulatory crackdown on several technology related sectors. While we still believe there is opportunity there, these actions served as a fresh reminder of the challenges investors face when investing in a communist country. The MSCI EM index which is heavily weighted to Chinese companies (the country represents +45% of the index) was down -8.09% for the quarter and now stands at -1.25% YTD.
Fixed Income markets also saw increased volatility during the quarter. The yield on the 10yr Treasury trended lower at the outset of the quarter going from a high of 1.47% to a low of 1.17% in August. This trend reversed in September following the Fed’s FOMC meeting and the possibility that higher inflation may persist longer than originally anticipated. The 10yr yield stood at 1.49% on 9/30. The Barclays U.S. Aggregate index which is an index of investment grade fixed income closed the quarter up +0.05%.
As we enter the 4th quarter, we believe the macro economic backdrop continues to support a sustainable economic growth cycle with several more years of economic expansion likely ahead us. Unemployment rates are steadily improving which should continue as the number of job openings currently outnumbers those that remain unemployed. Companies are restocking inventories to deal with the surge in demand seen during the first half of the year. Commercial and residential real estate construction activity is increasing after a springtime lull. Monetary policy is still loose, even with the Fed indicating they will taper their bond buying program, and, perhaps most importantly, consumers have emerged from the pandemic with a higher level of savings and stronger personal balance sheets.
That is the good news. However there are several concerning factors near term that we expect will add to volatility:
1. Taper Talk –The below chart illustrates just how easy monetary policy has been during the pandemic. Clearly, central banks will need to turn off the liquidity spigot at some point in the future. And although the Fed has done an excellent job of foreshadowing when they will begin to taper asset purchases, uncertainty still exists around the execution.
2. Inflation — Up until recently, the Fed has kept steady in their view that inflation is transitory, a belief that we share based on the long term factors of inflation. However, the longer it stays elevated the more jittery investors will become as the calls for interest rate hikes grow louder. Higher rates are typically a detractor from growth but given how low rates are today, we do not expect the first couple of rate hikes to have much effect on equity prices. In analyzing historical data, we see that since the Financial Crisis, both rates and equities are highly correlated until the 10yr treasury reaches 3.60%, after which that relationship turns negative.
The global economy is moving forward in fits and starts, with varying results across different regions of the world. Covid-19 still remains a front and center issue, but as the world learns to live with Covid and navigate the challenges a new disease brings with it, we expect both companies and economies to move forward and, indeed, find new opportunities. The focus heading into 2022 will be on interest rates and inflation and with how the Fed eliminates some of the extraordinary policy support enacted at the height of pandemic. Though concerns around policy execution are valid, we view any substantial weakness in equities as a buying opportunity for investors. We do expect the Fed will begin to raise rates late in 2022 and the market will likely forecast that well in advance leading to possible opportunities to rebalance portfolios into higher yielding, income oriented positions. Today, equities remain the asset class of choice as the investment options that will generate positive, inflation-adjusted returns, remain limited.
As always, we welcome any questions or thoughts and look forward to connecting with you before year end.
The Information contained in this document is based on data received from third parties which we believe to be reliable and accurate. YorkBridge Wealth Partners, LLC has not independently verified the information and does not otherwise give any warranty as to the truth, accuracy, or completeness of such third party data, and it should not be relied upon as such. Any opinions expressed herein are our current opinions only. YorkBridge Wealth Partners, LLC is an SEC Registered Investment Adviser under the Investment Advisers Act of 1940 (“Advisers Act”). Registration of an investment advisor does not imply any specific level of skill or training. The information contained in this document is to assist with general planning. Please consult with your own tax advisor and attorney for more specific information.