What happened in Q3?

Three-quarters of the way through 2021 and it seems like the year just started in many ways. Overall, the broad market and US economy weathered the quarter well considering ongoing policy debate, Federal Reserve meetings, and continued repercussions from the COVID-19 pandemic.

Looking at the quarterly numbers alone paint a bleak picture of the previous three months, but the figures produced YTD reveal a bigger story that the economy and market have been progressively growing in 2021. Three equity indices – S&P 500, NASDAQ Composite, and Dow Jones Global Dow – had somewhat similar trends, with the tech-heavy S&P 500 Index closing out the third quarter on top. The Bloomberg Barclays US Aggregate Bond Index (the Agg), the most widely used bond benchmark revealed a little movement in Q3, keeping bond yields down through the year.

Honing in on top-performing domestic equity sectors in healthcare, real estate, and technology along with the booming natural gas commodity shows significant growth over the last nine months. While risk is always present, prospective policy changes, modification to tax law looming, and various other factors that will be covered seem to have heightened investor awareness in the previous quarter.

Early in September domestic stock indices reached all-time highs in hopes of a continued economic reopening, but those peaks were short-lived as market sentiment shifted to a resurgence of the coronavirus Delta variant, continued strife on the hill over economic relief and debt limitations, interest rate talks at the Federal Reserve, and increasing initial unemployment claims.

Coronavirus cases did see a surge in Q3 which in turn led to missed expectations of new jobs created due to tighter health restrictions. Specifically, in the leisure and hospitality industry zero jobs were added in the month of August, with restaurants and retailers losing 42,000 and 29,000 jobs respectively. Thankfully the last week of the quarter saw a slow down of initial jobless claims to 326,000, taking claims to the lowest level since the beginning of September.

The unemployment report directly correlates to rising inflation as employers raise wages for those still working, and costs of goods and services increase. Another headwind for the reopening economy is current interest rates for borrowing money.

Typically the successful long-term investor owns a mixture of fixed income, equities, cash, and alternative investments like real estate, technology infrastructure, or bank loans to name a few. Specific asset allocation varies depending on the targeted use for the funds, age, and risk tolerance. The current market for investors presents two primary challenges: low interest rates for fixed income and cash, and inflated prices for equities. In Q3 Federal Reserve chairman Jerome Powell indicated that the federal funds rate target might increase and the Federal Reserve will taper its bond-buying program if the economy meets certain recovery points over the next few quarters.

Continuously low interest rates have left investors few options for yield when in the lower-risk bond market, so the news of potentially higher rates at the correct time could present opportunities for purchasing viable fixed income products in the near future. As shown in the AGG, fixed income has tapered off through the year at -1.55%. To compare, in the past 45 years the worst calendar year performance for the taxable bond market was -2.92% in 1994.

This overall decrease in bond yield is not a sign that proper investment allocations should be compromised for potential overexposure in equities. If anything, this quarter has magnified the need to stay even more dedicated to the acceptable stock-to-bond investment allocation tailored specifically to be prepared for inevitable market shifts in the coming months.

*Indices data from Orion performance reporting

https://fidelityfiplus.econoday.com/byshoweventfull.asp?fid=522823&cust=fidelityFIplus&year=2021&lid=0&prev=/byweek.asp#top

https://allworthfinancial.com/september-2021-market-update

MFS By The Numbers 10/4/2021

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