fearing inflation

fearing inflation

4Q21 Market Overview

The global recovery stalled in the third quarter as Covid-19 infection rates rose and inflation concerns persisted. These worries coupled with the U.S. political drama around the debt ceiling deadline and infrastructure spending plans provided late quarter headwinds.

Moving forward, attention will continue to focus on equity market valuations and whether corporate profits and economic growth can keep pace with expectations. Visible challenges will include inflation, Covid-19 vaccination adoption rates, higher taxes, and tighter monetary policy. Regardless of the market direction, our disciplined process will utilize market changes to shift towards our target allocations in the most tax-efficient manner possible while maintaining your desired risk level and fulfilling your cash flow requirements.

U.S. Equity Markets

U.S. equity markets gave back gains experienced in July and August to finish the quarter with a modest loss of -0.10% for the Russell 3000. Strong corporate earnings lifted markets early in the quarter before a spike in September Covid infections, inflation concerns and tighter monetary policy guidance set-in. Although the recovery from March 2020 has been exceptional, the resurgence in Covid infections and vaccination resistance is a concern. With about 60% of the U.S. population vaccinated, we lag most other developed countries, and this could result in diminished economic growth. Assuming we can continue the growth trajectory without further Covid restrictions, most economists believe consumer consumption will shift from personal goods to travel and entertainment service expenditures. This spending rotation could allow supply chain issues and inflation to normalize. In addition to these developments, the U.S. economy only added 194,000 jobs in September and the unemployment rate dropped to 4.8% according to the U.S. Bureau of Labor Statics. Based on the leading economic indicators, the U.S. expansion trajectory continues to look bright, especially if Covid-19 can be contained.

International Equity Markets

International developed equity markets finished the quarter with a -0.45% loss for the MSCI EAFE. With over 70% of the adult Eurozone population vaccinated, many travel and other restrictions were lifted to boost their economic recovery. Although Eurozone gains were positive, inflation and supply chain concerns weighed on markets late in the quarter. Japan’s positive business activity buyer trends and capital expenditure plans overshadowed Japanese automaker production cutbacks resulting from semiconductor shortages to lift their equity market 5.2% during the quarter. The MSCI emerging markets lost -8.1% during the quarter. Concerns about the slow rollout of Covid vaccinations started to fade, however, a sharp sell-off in Chinese equities in response to the potential collapse of China’s second largest real estate developer – Evergrande weighed on markets. Both developed and undeveloped international markets look more attractive from a valuation perspective compared to U.S. markets.

Fixed Income Markets

Safety-minded investors experienced slightly positive results as the closely watched Barclays Aggregate gained 0.05% during the quarter. Yields initially fell in the quarter and then pulled back sharply in the final few weeks as concern turned to inflation and the prospect of tighter monetary policy sooner than originally expected. These concerns elevated the 10-year Treasury during the quarter from 1.45% to 1.52% on September 30. Given the quiet yield movement over the past three months, it is not surprising to see little change in the short to long term duration bonds. The Barclays US Government Long posted a 0.46% quarter gain, Intermediate – no change and Short 0.07% gain. In the international fixed-income arena, the JPM Non-US Unhedged lost -1.93%. The Barclays Municipal finished the quarter with loss of -0.27% as rising yields and rich valuations were a drag on performance.

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