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Quarterly Commentary – September 2021

The third quarter of 2021 brought slightly higher levels for the US Equity Market, and we are nicely up for the year. The following are performance numbers from various popular indexes. Please remember index numbers are not individually comparable to a properly diversified portfolio. Each portfolio may include an allocation to securities similar-to these indexes in varying amounts based on your personal risk tolerance and should only be compared in that context. Year to date for 2021, the S&P 500 was up 15.9%. The Dow Jones Industrial Average was up 12.1%. The Nasdaq Composite Index was up 12.7%. The Russell 2000 Index was up 12.4%. International equities as represented by the MSCI AC World Ex U.S. Index were up 5.9%. The MSCI Emerging Markets Index was down 1.2%. Fixed Income as represented by the Bloomberg Barclays Aggregate Bond Index ended down 1.6% for the year.

Earlier in September, we experienced a bit of a sell-off in the equity markets over global risk concerns. This later abated and markets bounced back somewhat, only to drop back down in the last few days of the quarter. Most recently the equity markets reacted to fears of contagion from the potential collapse of a Chinese company called Evergrande. This is a giant company involved in property development, heavily indebted and at the edge of default which could create a ripple through the financial markets from a chain of defaults and the undermining of economic activity. China is working through a property and credit bubble. The lack of communication from the Chinese Government over how it might address the situation is cause for concern, but the reality is that they are vested in maintaining stability and preventing unrest such that they will most likely use their significant control to contain the situation. Even if contained, the problem will potentially be that China which has been one of the world’s fastest growing Economy could see a slip that would affect business activity worldwide and hamper global growth as a result.

On the domestic front, a read from the Fed suggests tapering to begin in November, however it appears that we are still ways from rate hikes at this juncture and without any real surprise, the markets were appeased. The concern however is that the Fed may have waited too long by waiting for some return to normal. The Fed Chair said that inflation reflects the mismatch between supply and demand and reiterated his views that the price pressures are transitory and should subside. Inflation is a significant risk for equities. There is some debate about how transitory it is and given the high level of pressure on both the supply and demand side of the equation, it has become hard to assess. Additionally, as bond yields recalibrate to the upcoming unwind of Fed support, long term yields have been edging up and caused equities to drop consequently. The talks of government shutdown over the debt ceiling are the revolving topic that continues to exemplify the disfunction in Washington. The good news is that there is plenty of cash to service the debt. With only hours to spare, Congress passed legislation that will keep the government funded until December 3rd as a short-term measure. A U.S. debt default is unlikely, but we will certainly hear a lot about it in the coming weeks as attention will turn to raising the limit on federal borrowing.

The continued risks on the horizon revolve around the Covid-19 headwinds, the tax and regulatory risks, supply chain issues that continue to create imbalances and corporate warnings. Monetary policy and expectation of continued earnings growth will remain supportive for the time being. We understand however that nothing keeps going up forever and timing a direction change is very challenging. By some measures, stocks, or at least certain areas of the equity markets can seem extended, but as we know that is not necessarily a showstopper. The worst-case scenario with the tax changes seems to hopefully be off the table, but we are potentially facing material increases in taxes which would be a drag on the economy. Covid has taken several million people out of the labor force with some retiring early, changing careers, getting on disability…. Many are reluctant to come back to the workforce given the Covid environment. Labor shortages will require higher wages to attract the required number of workers and with the demographic trends that were already contributing to a reduction of the working-age population, it will create some challenges to generate the GDP growth we have been looking for. The possibility however is that getting past this pandemic sooner than later could create a huge turnaround, particularly to sentiment and that might be the catalyst to resolving the imbalance on worker availability and supporting stronger economic growth. This relatively good possibility is in essence making the equity markets more resilient as the fear of missing out sets in. Thus far any downward pressure has quickly been met by buying support.

How all these variables and those we don’t know about yet mesh to help shape the near-term future for financial markets is an unknown. What we know is that staying the course and adjusting the risks for individual situations along the way is the most sensible approach.
We wish you an enjoyable fall. Thank you for the opportunity to serve you!