Quarterly Newsletter for the 3rd Quarter 2021
Despite the downturn of approximately 5% in the month of September, the equity markets are showing positive returns through September 30. On a price return basis, the Dow Jones Industrial Average (DJIA) was down 1.91% for the third quarter and up 10.58% year to date. The Standard and Poor 500 (S&P 500) was up 0.23% for the past quarter and 14.68% for the year, while the NASDAQ was down 0.38% for the quarter, but up 12.11% for the nine months. Overseas, the MSCI all Country World ex-US Index has gained 5.90% year to date. In the fixed income environment, the Barclays Merrill Lynch 3-month Treasury Bill Index yielded 0.01% for the past quarter and only 0.04% for the year.
Fixed Income Market (Bonds): The Fed has been and is currently holding onto its accommodative policies and retaining a low interest rate stance. They have, however, telegraphed their intent to back off or “taper” their quantitative easing policy. This tapering is expected to begin by the end of this year and be finished by the summer of 2022. It raises the likelihood of a rate increase in 2022. Inflation continues to be the biggest concern. The September CPI (Consumer Price Index) topped expectations at 5.4%, before seasonal adjustments. This matches the largest annual gain since 2008. Inflation was primarily driven by increases in food prices, the cost of shelter and higher oil and gas prices. While supply chain strains may keep inflation elevated into 2022, we expect this to work itself out and come back to normal; thus, inflation will moderate toward the Fed’s target of 2%. Finally, as the government passes additional fiscal stimulus packages, there will be a need for increased borrowing. This borrowing coupled with the Fed easing up on its purchases of Treasuries (tapering) should act as a headwind for bond prices.
US Equity Market (Stocks): After two months of disappointing jobs reports, coupled with rising wages and inflationary pressures that appear to be more persistent than expected, the equity market suffered a slight setback in the month of September. The Delta variant has led the way to both a supply shortage and a pause in the reopening of services. Supply chain interruptions has caused a decline in inventories. These forces seem to be waning and we expect them to be relatively short lived. Consumer confidence dropped slightly but should ram up in the months to come. Third quarter corporate earnings are expected to be mostly positive. The consumer still has a tremendous amount of money and consumer debt is relatively low. In point of fact- household net worth has doubled since the end of 2007, while household debt has declined by about 35%. These factors all pave the way for a robust economy through the remainder of 2021 and into the first six months of 2022.
Overseas Equity Market (Stocks): The overseas markets look poised for continued recovery and further growth. Year to date, it has shown slight gains, but we believe that could greatly improve. Today, the U.S. is ranked 50th in terms of vaccination shots per 100; thus, many countries around world have surpassed us in their fight against the Corona virus. Worldwide, stock dividends average about 3% per year- as compared with U.S. dividends of 1.5%. The value of overseas equity market is still relatively low as compared to the U.S. market. These are all good signs for positive returns in the overseas equity market.
Conclusion: Up until September, the broad markets have gone nearly eight months without a pull back of more than 5%. We believe that we have experienced our mild correction and are positive about future of the U.S. stock market. We are also positive about the overseas market and feel that we could see significant gains as they continue their recovery from the pandemic. Navigating fixed income markets will be challenging over the next 12-18 months as nominal yields grind higher and robust economic activity keep credit spreads tight. We are neutral/cautious on this market.