2021 | 3rd Quarter
While the S&P 500 hit all-time highs in the third quarter, market volatility picked up in the final weeks of September reminding investors that the post pandemic’s “new normal” comes with limitations. Concerns about rising inflation, global supply chain bottlenecks and the resurgence of COVID-19 cases amongst other things dampened investor sentiment and pressured stocks and other assets. Comparing stocks by market capitalization, large-cap stocks outperformed small-cap stocks. The S&P 500 ended with a slight gain of 0.60% compared to the Russell 2000 down more than 4.3%.
At a sector level, performance was mixed across the board unlike previous quarters where most sectors rose in tandem. Six of the 11 S&P 500 sectors were positive including Healthcare, Technology and Financials. As bond yields rose in late September, financial stocks outperformed technology as the best performing sector. Healthcare also performed positively as FDA approvals on COVID-19 vaccines and vaccine booster shots became more frequent. On the contrary, Energy, Industrial and Material sectors finished negative for the quarter as labor shortages and uncertainty in economic growth caused investors to become more concerned about the outlook of higher costs and inflation pressures.
Internationally, developed markets were in-line with the S&P 500, while emerging markets decreased sharply by 8% due to fears of interest rates increasing and Chinese government crackdowns on the private sector.
Returns in the fixed income market were mostly positive but also reflected the concern that rates would continue to increase due to inflationary pressures and the scaling back of the FED’s $120 billion per month purchases of bonds. Inflation protected securities (TIPS) continued to be the strongest performer during the quarter. For the year, only TIPS and high yield debt have posted positive returns in the taxable fixed income asset class. Tax advantaged Municipal bonds were down slightly for the quarter but still have marginal positive returns for the year.
It remains to be seen what becomes of the ongoing policy battle and what laws come forward. As we have pointed out before, there has been roughly $6 trillion in Covid related stimulus spending over the past eighteen months. The current $1 trillion proposed infrastructure bill that has bipartisan support and would provide economic benefits from spending on needed infrastructure projects. That being said, the $3.5 trillion budget reconciliation bill being negotiated would involve significant changes in tax and spending policies but has run into hurdles due to objections from both political parties. We remain concerned that increases in capital gains and corporate tax rates occurring while the FED starts tapering its asset purchases and moves towards increasing interest rates will increase market volatility in the short run.
Our outlook continues to be that higher market volatility is probable as investors react to inflation data, changes in Fed policy, and as the political process takes its course. If inflationary pressures prove to be less transitory than most market participants anticipate, or the huge amounts of stimulus pumped into the economy drive interest rates significantly higher, returns on bonds will turn negative. Shorter maturity bonds and high-quality municipals continue to make up the bulk of our fixed income holdings.
While we recognize that large market swings on a short-term basis is unnerving, we continue to take into consideration having a well-executed, diversified, long-term plan is key to successful investing. Therefore, we still advise a higher exposure to equities given their relative attractiveness to bonds.
As always, please call with any questions.
Jonathan F. Kolle, CFA Joseph K. Champness Shawn R. Keane, CFP®
President Director Vice-President
Rusty Giles James V. Kelly, CFA
Director of Marketing Director