Q3 Market Review and Look Ahead
Global Economies and Markets
Many positive steps have occurred. Many remain.
Q3 market review: the third quarter of 2021 was a further extension of the previous quarter’s economic recovery, though the unfortunate emergence of the coronavirus Delta variant is creating a bumpier recovery than many had hoped for. Recent employment data from the Bureau of Labor Statistics indicates the economy’s service sector is still facing headwinds. Leisure and hospitality jobs are still 10% below February 2020 levels, and the sector’s unemployment rate is still above 9%. Other factors, such as rising wage pressures and unfilled jobs remain areas of focus for investors. There have been many positive steps in 2021 toward normalcy. Many remain.
Investors remained generally optimistic throughout the quarter, although the equity markets have taken a bit of a “pause” compared to the first half of the year. The broad domestic markets, as measured by the S&P 500, returned 0.6% in the third quarter, shy of the returns in the first half of the year. Investor expectations have been tempered by inflation fears, supply bottlenecks, and labor shortages, as well as what those disruptions could mean for ongoing business conditions. While broad large cap stock returns were relatively flat, their smaller cap counterparts posted negative returns for the quarter, as larger-sized companies are often better able to absorb disruptions than smaller-sized companies.
Non-U.S. markets faced similar headwinds. Developed markets outside the U.S., which are economies with higher levels of political stability and industrialization, returned -2.9% compared to +5.6% last quarter in our Q3 market review. Emerging markets deteriorated even more noticeably, returning -8.0% in the quarter compared to +5.1% last quarter. China is a large part of this emerging market slowdown. The country’s increasingly forceful economic actions have impacted business conditions; the country’s anti-monopoly enforcement and anti-trust regulations have been key focuses of investors. In addition, the country’s aggressive approach to fighting the Delta variant has limited consumer activities. Travel restrictions and lockdowns have been common. China’s retail sales figures in August rose just 2.5% compared to last year, well below the 7% increase investors expected.
U.S. bond performance has been challenged with an unusually low yield environment in our Q3 market review. Investors have been reaching for yield in different ways, including adding money to riskier, high-yield bond categories to generate returns. Part of this behavior is driven by concerns over interest rate increases. Higher interest rates typically push bond prices lower. The new Federal Reserve policy statement showcased that half of the Fed’s officials believe interest rate rises could occur next year.
2021 has fortunately shown signs of promising improvement but inflation and employment remain key concerns. The potential slowing of the Federal Reserve’s bond buying and the possibility of higher interest rates could impact mortgage rates along with consumer and business borrowing. The duration of the recent Emerging Market slowdown remains to be seen. Investors will be closely watching these themes in the coming months.
What Does This Mean for Me?
The markets and the economy appear to be regrouping after a strong recovery from the lows of March 2020. It is in times like these when we seek out support, ask questions, and better understand our financial picture. Domani Wealth takes the trust clients place in us seriously, and we are by their side to help them feel comfortable about their financial future. Working with us, clients can take a deep breath and feel confident in knowing our prudent diversification and careful planning help them navigate challenging environments.
Know that we are always paying careful attention to each client’s portfolio and financial goals, and as we see changes in the market environment, we continue to revisit allocations, review cash needs, and communicate accordingly. We are always here to have a conversation, answer a concern, or adjust plans to best suit each client. If you’d like to start a conversation, ask us a question, or gain some insights, please call us anytime.