The third quarter of 2021 was marked with investors continuing to experience above average gains for the year, but with some bumps in the road during September.
Major global events, such as the continuation of the Delta variant, chaos in Afghanistan, and the China Evergrande debt default have been dominating the headlines. These events, and concerns about “new market highs” continue to worry some investors.
Investment professionals use a term “climbing the wall of worry” to describe what we have been experiencing recently. This expression emerged from an observation that investments can continue to grow in value despite numerous factors that appear to pose serious threats to markets. Today’s list of worries includes potential stagflation, Q3 earnings, bond yields, huge spending and tax proposals, stock valuations, and the debt ceiling, to name a few.
But there are also reasons to be optimistic about future market returns. The jump in inflation that the Fed described as ‘transitory” has indeed moderated (at least temporarily). Corporate earnings are showing reasonable growth, and personal income for American workers is growing. These factors should bode well for economic growth. Further, if the massive infrastructure spending bill passes, it could boost a number of economic sectors.
During any point in history there are reasons to be both optimistic and pessimistic about short term market returns. What we know for sure is that markets have always eventually reached new highs, despite major disruptions along the way. Our message remains the same: If you stay disciplined in your investment principals, you are likely to have a better investment experience and be rewarded over the long run.
Today’s Economic Perspective
Projections for GDP (Gross Domestic Product) show some likely contraction in the rate of growth during Q3, attributable to the latest surge in the Delta variant. However, economists site the more recent decline in daily Covid cases as an argument for potentially higher GDP in Q4.
The index of leading economic indicators (LEI), a forward-looking economic measure, rose sharply in August and remains on a rapidly rising trajectory. While the Delta variant – alongside rising inflationary fears – could negatively impact labor markets and the consumer spending outlook in the near term, the trend in the LEI is consistent with robust economic growth in the remainder of the year.
Today’s Market Perspective
The U.S. stock market experienced record highs during the quarter, followed by a 5% correction in September. As of the end of September, diversified stock investors were sitting on above average returns both year to date and for the quarter.
Rising stock prices are driven by corporate earnings, which are showing reasonable growth during a time of economic uncertainty. In the meantime, interest rates earned on the bond side of portfolios remain at historical lows. For example, the yield on a five year Treasury note is only about 1%, and the yield on short-term municipal bonds is about 0.08%. These low yields help explain the current appeal of stocks. Even at high valuations, the dividend yields on stocks are outperforming the income that can be produced by bonds.
Congress is now deliberating over increasing the top marginal corporate tax rate from 21% to 28% and the bill would also allow the IRS to collect taxes on U.S. based corporation’s foreign earnings. This can potentially weaken after tax profits for corporations and create some headwind for stocks going forward.
Prudent investors should expect and plan for short term stock market volatility. Corrections in the range of 5% to 15% are frequent, common, and not likely to last a long time. Bear markets, on the other hand, are characterized by a decline of 20% or more, are less frequent and normally associated with economic recession. Today’s economic indicators are not pointing to recession.
Short term volatility is unpleasant but should not be unduly alarming or trigger any changes to your investment plan.
Final Thoughts
A key goal of our firm is to help clients achieve a better investment experience. We seek to accomplish this by integrating your investment strategy with robust financial planning, while adhering to a number of time proven principles.
In addition, understanding how factors beyond investments impact your financial outcomes can drive better decision making. We dedicate professional attention toward identifying opportunities and encouraging actions that can help improve your financial well-being.
The combination of employing widely accepted risk management practices, keeping a cool head during periods of fear and uncertainty, and acting on opportunities that present themselves, is a powerful formula toward achieving your lifetime financial goals.
