Economic and Capital Market Commentary
Heading into Q4 2021, the growth we have witnessed in the market since the March 23, 2020 low is almost too staggering to believe – up 92.52% in the S&P 500 as of the end of September 2021.1 However, the month of September, itself, did prove to be more volatile than any other month yet this year, with the S&P 500 dropping 4.76%2 in a single month. While we can likely expect increased volatility in the coming year with the monetary policy shifts ahead leading to more inflationary outcomes, we are still predicting double-digit growth to continue into 2022.
The continued economic reopening throughout this past quarter helped to bolster the quarterly gains throughout the three-month period in U.S.-based companies. U.S. equities eked out a net positive return in the third quarter. Strong earnings were to thank for much of this in the run up to August, when the Federal Reserve seemed to strike a dovish tone, confirming its hesitance to tighten policy too fast. However, growth and inflation concerns late in the quarter led to U.S. stocks losing most of their gains by the end of September.
Up to this point, the rapid growth rate has mostly been a by-product of significant stimulus in the wake of the economic shutdown and its subsequent reopening. Companies’ corporate earnings were up overall during the past few quarters as sales increased and companies were able to pass through higher input costs to consumers, but the inflation we are now experiencing cannot be ignored.
Fed Chair, Jerome Powell stated in September that a slowdown in the pace of asset purchases can be expected in the months ahead and will finish by mid-2022. Meanwhile, the Fed funds rate projections now show a faster rate hiking schedule than originally predicted in June. The shift comes in the context of revised inflation rate – the Fed now sees inflation running to 4.2% this year, above its previous estimate of 3.4%. The Fed also raised its GDP projections for 2022 and 2023 to growth rates of 3.8% and 2.5%, respectively.3
Ultimately while we have seen significant growth and market returns since the downturn during the COVID-19 shutdown, our near-term outlook remains a bit more cautious. Global supply chain disruptions, mostly due to worker shortages, are compounding the inflationary pressures – companies’ inability to absorb further increased expenses to operate without passing along the costs to the end-consumer will lead to more price hikes.
However, even with these factors working against us, consumerism remains high, and analysts remain optimistic that the inflationary environment will be transitory as the economy attempts to normalize. Companies’ abilities to maintain high profit margins remain key to the earnings outlook. We believe companies will continue to find new ways to remain profitable while our participation investing in stocks will allow us to potentially experience growth in our portfolios.
The S&P 500 Index is a market-value weighted index provided by Standard & Poor’s and is comprised of 500 companies chosen for market size and industry group representation.
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