3rd Qtr Portfolio & Market Observations 2021

Equity returns for the last year and a half have been in a constant steady growth mode since the steep decline caused by the Covid-19 pandemic. The positive momentum continued in the beginning of the third quarter of 2021, with the broad market indexes reaching a series of all-time highs in July and August, powered by the resiliency of economic recovery and accommodative monetary policy of the Federal Reserve. This momentum leveled off in September as many of the positive factors that supported stocks earlier in the quarter began to fade, and the new and highly contagious Delta variant and other worries dampened investors’ enthusiasm. The equity markets were down across the board in September, which usually is the worst performing month for equities. As a result of those seasonal headwinds, the Dow Jones Industrial Average, the Russell 2000, and the Nasdaq lost value during the quarter, while the S&P 500 was able to hold on to a small quarterly gain. Large capitalization stocks outperformed small- and mid-caps in the third quarter and growth outperformed value thanks to the infotech sector gains, albeit that outperformance shrunk considerably during the final week of September. On a sector level, performance was more mixed than the previous two quarters as six of the eleven S&P 500 sectors produced positive returns in the third quarter with financials leading the way higher. Despite the downturn, the benchmark indexes remain well ahead of their 2020 closing values, showing healthy double-digit returns for the year.

Abroad, the international markets also suffered, both for the month of September and the entire quarter. Emerging markets dropped sharply, initially on concerns that rising Covid-19 cases would derail the global economy and fell even further on Chinese growth worries later in the quarter. Foreign developed markets, meanwhile, declined modestly during the final few weeks of the quarter but remained positive year-to-date.

Bonds were volatile during the quarter and continued to be negative for the year as rates rose and put pressure on prices. The yield on the 10-Year U.S. Treasury note broke higher from its multiple-week base and finished the quarter at 1.475% while the 2-Year/10-Year U.S. Treasury note yield spread widened.

The U.S. economic rebound has also been dented, partly due to the spread of the Delta coronavirus variant. After more than a year of rapid recovery from pandemic lows, the final third estimate of the second quarter’s GDP growth from the Bureau of Economic Analysis came slightly below expectations. A wide variety of metrics, including consumer spending, housing, the labor market, and business sentiment, also signaled slower growth during the third quarter. Only a fraction of the number of new jobs we saw created in June and July were created in August and the unemployment rate declined mostly due to the growing number of Americans no longer pursuing employment. Existing home sales fell, as well as the median prices for existing single-family homes. As in most other countries, the U.S. economy is facing global supply chain disruptions due to the pandemic, which have also pushed up inflation.

The Federal Reserve stated in September that a tapering of quantitative easing will be announced at the November meeting, as expected, and will finish by mid-2022. Meanwhile, federal funds rate projections now show rates increasing much faster than previously anticipated. The median rate expectation for 2023 moved up to three hikes from two in June, with three additional hikes in 2024. Fed officials were evenly split 9-9 on a rate hike in 2022.

We are entering the final quarter of 2021 with several looming uncertainties which may cause elevated volatility. U.S. companies could be paying more corporate tax in 2022, negatively impacting future earnings and stock prices. The Fed plans to unwind stimulus by the end of this year which may place pressure on stocks, especially if interest rates rise too quickly.

However, even as September ended the third quarter with a substantial increase in risk, stocks began to reverse their negative momentum, and there are reasons to believe the fourth quarter will be better. The medical news, which drove much of the market damage, is starting to improve as new case growth, positive test rates, and hospitalizations were down by the end of September. Inflation may very well be with us for a longer period than the Fed expects, and combined with continued supply chain disruptions, may start to impact corporate margins and profitability.

For investors with prudently crafted portfolios, supported by a team of dedicated professionals, all those aspects are factored in their long-term plans. Therefore, it is critical to stay invested, remain patient, and stick to the plan designed based on their financial position, risk tolerance and investment timeline.

Dumont & Blake Investment Advisors, LLC
September 30, 2021