The third quarter of 2021 began with optimism around strong company earnings, positive momentum, and American consumers flush with cash to spend. However, by August, the global stock rally staged a modest retreat, with challenges accumulating by the end of September, flipping performance from positive to negative in many regions. The market reacted to fears of an economic slowdown after a rise in the Delta variant, supply chain shortages, and government crackdowns in China. Despite these short-term issues, we still believe the recovery from the pandemic remains on track while acknowledging the road ahead will be bumpy as many headwinds persist.
During the quarter, broad-based global equity indexes were flat as macro headwinds hurt consumer and investor confidence. The S&P 500 rose 0.58% beating both the Nasdaq Composite’s decline of 0.22% and the Dow Jones Industrial Average’s loss of 1.46%. Large-cap stocks continued to outperform mid-cap stocks, with the Russell 1000 Index finishing 0.21% compared to the Russell 2000 Index, which declined 4.36% for the quarter. Bitcoin and Ethereum rebounded, adding 25% and 31.8%, mostly uncorrelated with other major investable markets. The 10-year Treasury bond yields finished the quarter at 1.49%, roughly unchanged from June and below the 1.74% peak posted at the end of March.
Meanwhile global supply shocks pushed prices higher across the commodities complex, increasing the upside risk to the global inflation outlook. Crude-oil prices moved lower during the first half of the quarter but then reversed to end the period higher. OPEC decided to maintain monthly increase in production of 400,000 barrels per day, sending the price of West Texas crude to its highest levels in years.
The People’s Republic of China had an outsized influence over global market volatility during the quarter, as businesses and entrepreneurs felt greater state controls as part of China’s priority of ‘common prosperity’. Also, Evergrande, one of China’s largest real estate developers, faced a pivotal turning point in July when several banks began denying mortgages and markets wondered if we were witnessing another “Lehman moment.”
Back in Washington, with the Democrats enjoying a razor-thin majority, the US Senate passed a $1 trillion “physical infrastructure bill” after months of negotiation. Intraparty tensions are jeopardizing it along with the trillion dollar “social infrastructure bill”. Also, with midterm election campaigns in the early stages, the narrow majorities in both Houses of Congress are likely to prevent passage of significant tax changes.
Over the course of the quarter, the Federal Open Market Committee moved incrementally closer to declaring a start date for reducing their ongoing asset purchases. The Fed noted in its latest quarterly Summary of Economic Projections that the timing of the next interest-rate hike has also moved up to 2022 from 2023. So far, Fed has done a masterful job of calming markets that inflationary pressures are contained and "transitory".
Looking forward, we expect this period of consolidation to continue, but ultimately, we believe the US economic recovery remains on track and equity markets should move higher over the course of the next twelve months or so. We continue to see signs that global inflation may prove to be sticky, thus we are maintaining underweight positions on bonds. Higher bond yields and less accommodative monetary conditions will eventually create a headwind for equity valuations as well. For now, stocks are likely to outperform but with greater volatility than in the past 18 months.
As we turn the page to the fourth quarter, the year is passing quickly and the fall season is upon us. We do appreciate your trust in our team at KG Advisors. Managing client assets and financial plans is a responsibility we do not take lightly. We believe our ongoing service and dynamic investment process provides clients the unique opportunity to capture growth while reducing the impact any severe market declines. As always, please let us know you have any questions about your financial plans or strategy, or if you have any changes that may have occurred affecting your longer-term goals. We look forward to seeing you soon.
Eric W. Kendrick, CFP Partner