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 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


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


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.













S&P 500






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

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  1., September 2, 2021
  2., September 10, 2021
  3., September 8, 2021
  4., September 10, 2021
  5., September 14, 2021
  6., September 30, 2021
  7., September 22, 2021
  8., September 30, 2021
  9., September 30, 2021
  10., September 28, 2021
  11., September 21, 2021
  12., July 16, 2021
  13., September 30, 2021
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