Presented by LongView Wealth Management

Stocks raced higher through the first two months of the third quarter, overcoming rising Delta variant infections, a slowing economic expansion, and growing inflation worries. This market growth was propelled by strong corporate earnings, the absence of compelling investment alternatives to stocks, and a “buy on the dip” investor mentality. Investors, however, turned more cautious in September, wary of the season’s rocky reputation, persistently high levels of COVID-19 cases, and the fiscal and tax policies under discussion in Washington, D.C.

Amid this caution, September turned volatile with stocks retracing their earlier gains. Seasonal weakness was exacerbated by rising bond yields and the mounting financial difficulties of a debt-laden, large property developer in China.

Stocks steadied briefly following a Federal Reserve announcement that bond buying would continue. A surge in bond yields in the closing week of the quarter, however, unsettled investors and led to steep declines, especially in technology and other high growth stocks.

In the end, September erased the gains built over the previous two months, leaving major indices largely flat for the third quarter.

THE U.S. ECONOMY

The momentum of the U.S. economic recovery slowed during the third quarter as a surge of Delta variant infections led to a deceleration in economic activity, especially in industries such as travel, restaurants, and tourism. Economic expansion was further affected by supply chain bottlenecks, labor shortages, and constrained home sales due to low inventory.

Despite constraints, though, manufacturing, transportation, and non-financial services continued their strong growth in the third quarter.

Labor markets improved over the quarter to the point that employers now face labor shortages. The Federal Reserve Bank ascribed a range of reasons for the worker shortage, including increased turnover, early retirements, childcare needs, challenges in negotiating job offers, and enhanced unemployment benefits.3

Inflationary pressures such as supply shortages, rising transportation costs, and wage increases have led to higher consumer costs in recent months. August brought an 8.3% year-over-year jump in producer prices and a 5.3% 12-month increase in consumer prices.4,5   

The extent to which economic growth may have slowed in the third quarter won’t be known until October’s release of the Q3 Gross Domestic Product (GDP) report. However, economic modeling by the Federal Reserve Bank of Atlanta, predicts a 3.2% annualized real rate of GDP growth in the third quarter – still positive, but a retreat from its earlier prediction of 5.3% on September 1.6

Additionally, The Federal Open Market Committee’s economic projections issued in September also reflect a more cautious near-term economic view.  2021 GDP growth projections were revised lower from June estimates – from 7.0% to 5.9% – while inflation estimates jumped from 3.4% to 4.2%.7

GLOBAL ECONOMIC HEALTH

The outlook for economic growth in European Union (EU) countries grew more positive with widening vaccinations, an improving health situation, and the easing of lockdown measures. The European Commission expects output to return to pre-crisis levels by the fourth quarter of 2021. GDP growth estimates were lifted to 4.8% for 2021, while 2022 growth is expected to be 4.5%. Inflation estimates were raised to 2.2% for 2021 and 1.6% in 2022.9

The economic momentum the United Kingdom enjoyed in the second quarter appeared to abate during the third quarter due to a resurgence in COVID-19 infections, staff shortages, kinks in the global supply chain, and continuing trade tensions with the EU. Nevertheless, the U.K. economy is projected to post a 6.6% growth rate for 2021 and a 5.5% expansion in 2022.10

After recording two successive quarters of strong economic growth, China’s economy showed signs of slowing down. Flooding, higher input prices, and a surge in COVID-19 infections all weighed heavily. It’s estimated that China will end the year with a GDP growth rate of 8.5% and a 2022 estimate of 5.5%.11

The MSCI-EAFE Index, which tracks developed overseas markets, slipped 1.03% in Q3, while emerging markets, as measured by the MSCI-EM (Emerging Markets) Index, declined 8.84%.13

LOOKING BACK, LOOKING FORWARD

The third quarter was a reminder of how difficult it is to project the future amid a global pandemic. Investors entered July increasingly optimistic about the economic recovery, the prospect of rising vaccination rates, the reopening of schools, an easing in labor shortages, and a return to the office. By September, with the Delta variant lingering, employers delayed their plans for a return to the office, some mask mandates were reinstated, and consumers pulled back on spending and travel.

Despite the deceleration in economic expansion, markets managed to climb to new record highs through most of the third quarter, before stumbling in September.

If the market is to add to its year-to-date gains in the fourth quarter, it will need to climb a wall of worry. The worries include the expected start of tapering bond purchases, global central bank tightening, fiscal and tax policy uncertainties, Covid infection levels, inflation, and whether corporate earnings can continue to impress in the wake of this quarter’s economic slowdown.

With the Federal Reserve’s September announcement that it may begin tapering, the Fed joins a growing number of global central banks that have begun winding down the accommodative monetary policies that were put in place in response to the pandemic.

Of course, the pace of monetary tightening may be dictated, in part, by the prevalence of Delta variant infections as well as the state of labor market recovery, which continues to be prioritized over inflation.

Inflation has touched levels not seen in over 40 years. Supply chain constraints continue to be a major factor in higher prices for businesses and, in turn, consumers. These bottlenecks may last for another year or longer before beginning to loosen. For now, the credit and equity markets seem to agree with Fed Chair Jerome Powell’s argument that inflation is transitory.

The question for investors is whether the markets will continue to accept inflation as a transitory phenomenon should price pressures continue.

While Washington may have been a recent tailwind for the market, it may be a headwind in the months ahead. Investors are wary of the impact on investments and corporate profits included in the proposed infrastructure plan and the new taxes under discussion to pay for such spending.

Lastly, corporate profits and sales have exceeded market expectations in recent quarters, laying the foundation for the markets to move higher. As earnings are reported throughout October and November, businesses will need to once again show earnings growth to support current price levels as well as provide a rationale for higher valuations.

It’s a formidable wall to climb, but many of the conditions for continued stock market strength remain in place – a financially healthy consumer, an accommodative monetary policy, strong corporate earnings, healthy economic expansion, and improving corporate cash balances.

MARKET INDEX

Y-T-D CHANGE

Q3 CHANGE

Q2 CHANGE

DJIA

+10.58

-1.91

+4.61

NASDAQ

+12.11

-0.38

+9.49

S&P 500

+14.68

+0.23

+8.17

       

BOND YIELD

9/30 RATE

1 MO AGO

1 YR AGO

10 YR TREASURY

1.53%

1.29%

0.68%

 

Sources: Wall Street Journal, September 30, 2021, Treasury.gov (Bond Yield)

The market indexes discussed are unmanaged and generally considered representative of their respective markets. Individuals cannot directly invest in unmanaged indexes. Past performance does not guarantee future results. U.S. Treasury Notes are guaranteed by the federal government as to the timely payment of principal and interest. However, if you sell a Treasury Note prior to maturity, it may be worth more or less than the original price paid.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. The information herein has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. Investments will fluctuate and when redeemed may be worth more or less than when originally invested. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All market indices discussed are unmanaged and are not illustrative of any particular investment. Indices do not incur management fees, costs, or expenses. Investors cannot invest directly in indices. All economic and performance data is historical and not indicative of future results. The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks. The NASDAQ Composite Index is a market-weighted index of all over-the-counter common stocks traded on the National Association of Securities Dealers Automated Quotation System. The Standard & Poor’s 500 (S&P 500) is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. NYSE Group, Inc. (NYSE:NYX) operates two securities exchanges: the New York Stock Exchange (the “NYSE”) and NYSE Arca (formerly known as the Archipelago Exchange, or ArcaEx®, and the Pacific Exchange). NYSE Group is a leading provider of securities listing, trading and market data products and services. The New York Mercantile Exchange, Inc. (NYMEX) is the world’s largest physical commodity futures exchange and the preeminent trading forum for energy and precious metals, with trading conducted through two divisions – the NYMEX Division, home to the energy, platinum, and palladium markets, and the COMEX Division, on which all other metals trade. The CAC-40 Index is a narrow-based, modified capitalization-weighted index of 40 companies listed on the Paris Bourse. The DAX 30 is a Blue Chip stock market index consisting of the 30 major German companies trading on the Frankfurt Stock Exchange. The FTSE 100 Index is a share index of the 100 most highly capitalized companies listed on the London Stock Exchange. BSE Sensex or Bombay Stock Exchange Sensitivity Index is a value-weighted index composed of 30 stocks that started January 1, 1986. Nikkei 225 (Ticker: ^N225) is a stock market index for the Tokyo Stock Exchange (TSE). The Nikkei average is the most watched index of Asian stocks. The Hang Seng Index is a free float-adjusted market capitalization-weighted stock market index that is the main indicator of the overall market performance in Hong Kong. The All Ordinaries (XAO) is considered a total market barometer for the Australian stock market and contains the 500 largest ASX-listed companies by way of market capitalization. The SSE Composite Index is an index of all stocks (A shares and B shares) that are traded at the Shanghai Stock Exchange. The S&P/TSX Composite Index is an index of the stock (equity) prices of the largest companies on the Toronto Stock Exchange (TSX) as measured by market capitalization. The MSCI Emerging Markets Index is a float-adjusted market capitalization index consisting of indices in more than 25 emerging economies. The MSCI World Index is a free-float weighted equity index that includes developed world markets and does not include emerging markets. The CBOE Volatility Index® is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices. The S&P SmallCap 600® measures the small-cap segment of the U.S. equity market. The Russell 2000 Index is a small-cap stock market index of the bottom 2,000 stocks in the Russell 3000 Index. Additional risks are associated with international investing, such as currency fluctuations, political and economic instability and differences in accounting standards. This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. MarketingPro, Inc. is not affiliated with any person or firm that may be providing this information to you. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional.

CITATIONS:

  1. insight.factset.com, September 2, 2021
  2. factset.com, September 10, 2021
  3. federalreserve.gov, September 8, 2021
  4. CNBC.com, September 10, 2021
  5. WSJ.com, September 14, 2021
  6. atlantafed.org, September 30, 2021
  7. federalreserve.gov, September 22, 2021
  8. sca.isr.umich.edu, September 30, 2021
  9. ec.europa.eu, September 30, 2021
  10. focus-economics.com, September 28, 2021
  11. focus-economics.com, September 21, 2021
  12. Reuters.com, July 16, 2021
  13. msci.com, September 30, 2021
Copyright © 2021
Longview Wealth Management