Third Quarter 2021 Update
November 10, 2021
- Lockdowns that had defined the early stages of the pandemic have for all intents and purposes ended, but there remain supply chain disruptions causing bottlenecks for many goods
- The FOMC made no change to the federal funds rate target range of 0% to 0.25%, but did provide the long-awaited advance notice of its plans to begin tapering the $120 billion of monthly asset purchases
- Broad-based indices posted their sixth consecutive quarter of gains, but heightened inflation and rising yields created higher volatility later in the quarter.
3rd QUARTER 2021 MARKET COMMENTARY
Below, we’ve highlighted 2021 broad market returns for the third quarter and year-to-date time periods:
|MSCI Emerging Markets||-8.0%||-1.0%|
|S&P Real Assets Equity||-0.9%||14.8%|
|Barclays Muni 5 Year||0.0%||0.3%|
THE GLOBAL ECONOMY
The US economy posted slowing but above-average growth in the quarter, supported by the dual tailwinds of accommodative monetary policy and historic fiscal stimulus. Lockdowns that had defined the early stages of the pandemic have for all intents and purposes ended, but there remain supply chain disruptions causing bottlenecks for many goods. Within this context, the Bureau of Economic Analysis released the third estimate of the second quarter 2021 real GDP, a seasonally adjusted annualized increase of 6.7%, slightly higher than the prior estimate, and an improvement over the 6.3% increase in the prior quarter. The employment situation also improved, but the most recent gains were less than expected. The August report showed that employers added 235,000 jobs in the month, and that the unemployment rate fell to 5.2%. The Federal Open Market Committee (FOMC) maintained its supportive monetary policy response to the pandemic, leaving the funds rate target range of 0% to 0.25% unchanged. However, the central bank provided advance notice that it would begin tapering its $120 billion monthly asset purchases, perhaps starting in December. The FOMC’s “dot plot,” a forecast of future rate changes, turned somewhat more hawkish, indicates the committee now expects the first interest rate hike to occur sometime in 2022.
Stocks finally encountered some headwinds after generating consistent positive monthly returns since March. Broad-based indices posted their sixth consecutive quarter of gains, but heightened inflation and rising yields created higher volatility later in the quarter. The S&P 500 rose steadily from the beginning of the quarter through early September, at which time it had gained 5.9%. However, seasonal influences, looming debt ceiling negotiations, and the aforementioned concern about inflation caused investors to take a portion of their profits. When the quarter ended, the S&P 500 Index had advanced +0.6%, and has gained +30% over the past 12 months. International stocks also generated mixed results during the quarter, and generally performed in line with US equities. The MSCI EAFE Index of developed markets stocks eased by -0.5%. Emerging markets performance was very poor, as the MSCI Emerging Markets Index was lower by -8.1%.
The FOMC made no change to the federal funds rate target range of 0% to 0.25%, but did provide the long-awaited advance notice of its plans to begin tapering the $120 billion of monthly asset purchases. Analysts believe the tapering could begin in December. The committee modified the language regarding inflation in the communication following its most recent meeting, stating that prices remain “elevated.” The FOMC’s “dot plot” – the forecast of the fed funds rate – now signals that the federal funds rate may be raised in 2022, whereas in prior statements the expectation was 2023. The median projection of committee members is that the fed funds rate will be 1% in 2023 and 1.8% in 2024.
Fixed income securities’ prices on balance were lower (and yields higher) in the quarter as the economic rebound continued and inflation began to pick up steam. Inflation was a concern to bond investors, and even though growth slowed from prior quarters, yields were firm. The upcoming negotiations in Congress over raising the debt ceiling and passing an infrastructure bill could create heightened volatility for bonds in the coming weeks. As mentioned above, the FOMC made no change to its policy stance, but indicated that it sees the fed funds rate rising in 2022, earlier than had previously been expected. The FOMC is expected to maintain the target federal funds rate range at between 0% to 0.25% for the next several quarters.
The global economy is moving forward in fits and starts, with varying results in different regions of the world. Covid-19 continues to be somewhat of a headwind for the economy, with the Delta variant raising concerns over a rise in new cases. At the same time, questions about the long-term efficacy of vaccinations, and debates about vaccine and mask mandates are causing increased societal polarization. In the US, growth has been resilient, but expectations have been moderated in recent weeks due to the impact of the Delta variant. The euro zone is faring better than expected from the perspective of economic prospects, with analysts forecasting 4% growth in 2022. In Asia, lower vaccination rates have caused governments to re-impose restrictions, putting a damper on economies. Economists are increasingly focusing on consumer sentiment, because as the effects of fiscal stimulus fade economies will need to rely on positive expectations about the future in order to sustain growth. Supply chain disruptions also remain a hurdle. Since Asia is a critical player in the supply chain, economists argue that improvement in supplies will be slow to come until the region sees a drop in Covid cases. In terms of central banks throughout the world, the expectation is that many will begin tapering soon, and that they will begin to raise rates in 2022, assuming growth is positive and inflation remains elevated. Despite stumbling into the end of the quarter, stock prices are not far off all-time highs, and still have valuations that are also near record levels. Historically, when valuations have been close to where they currently stand, forward returns have been muted.
Information provided is for informational purposes only and should not be construed as investment advice. The views expressed are current only as of the publication date, are based on information that St. Clair Advisors believes to be accurate, and subject to change without notice. All investment decisions must be evaluated as to whether they are consistent with your investment objectives, risk tolerance and financial situation. St. Clair disclaims any liability for any direct or incidental loss incurred by applying any of the information in this publication. Indexes are unmanaged and one cannot invest directly in an index. Past performance is no guarantee of future results.
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