Overview

The U.S. economy is expected to slow slightly according to most GDP estimates. Goldman Sachs economists, for example, slashed their forecast from 5.25% to 3.5% for GPD growth for Q3 citing concerns over the Delta variant for COVID-19 coupled with a weaker than expected jobs report in September. Still, it appears that new cases of the disease are declining, suggesting the worst of the Delta variant is behind us in the United States. Additionally, the W.H.O. is predicting that the virus will be manageable as early as March of 2022. This should help supply chains throughout the world which have faced numerous challenges and led to a slowdown in production for many industrial components and products. Other concerns that arose in the 3rd quarter include a Chinese firm, Evergrande, facing possible insolvency, U.S. politicians debating on whether to raise the debt ceiling, and an uptick in interest rates which put pressure particularly on growth stocks and the bond market.

U.S. Stock Market

Stocks had an up and down quarter and investors saw the biggest drawdown year-to-date with the market declining around 5% from its peak. Over the last 40 years the average peak to trough drop is around 14% within a year, so we still haven’t had a major decline on a relative basis in 2021. Similar to February of this year, a slight uptick in interest rates caused stocks to retreat. The Fed also announced in September their plans to begin “tapering” their bond buying program. This bond buying program is essentially a stimulus to the economy. Removing this stimulus from the Fed could cause the economy and stock market to slow.

Because stocks advanced the first 2 months of the quarter, the S&P 500 still managed to squeak out a meager 0.58% return for the quarter. The S&P Mid-Cap 400 Index and Russell 2000 Small-Cap index declined by (1.76%) and (4.36%), respectively. The tech focused NASDAQ declined by (0.23%).

International Stock Markets

Developed international stocks declined (0.45%) for the quarter as seen by the EAFE Index. Emerging market stocks struggled declining (8.09%) for the quarter as China continued implementing more regulations against companies. There also remains a risk that Chinese stocks could become delisted from exchanges here in the U.S. Additionally, concerns grew over whether China’s Evergrande, which is a large real estate conglomerate, would be able to meet its hefty debt obligations.The main fear here that exists is contagion risk. Is this just one firm that is struggling or will others follow in their footsteps?

Bond & Credit Markets

The Aggregate Bond Index returned a marginal 0.05% for the quarter. Interest rates moved dramatically throughout the quarter with the 10-year treasury yield falling all the way to around 1.13% before then ticking up to 1.57% before settling in around 1.52% by quarter end. While these rates are still historically very low, investors watch this rate carefully as when it begins moving higher, growth stocks face downward pressure. We have seen this recently with stocks selling off and tech/growth stocks being hit the hardest. Bond prices also move downward when interest rates rise so these holdings are also generally negatively impacted by rising rates.

Energy Stocks & Oil Prices

Energy sector stocks remain the winner year-to-date returning 43.2% although this sector was down (1.7%) for the third quarter.

WTI Crude oil closed the quarter with a price of $75.03 per barrel which is right about where it started at the quarter. Once the pandemic ends you would expect a larger demand for oil as more people travel again.

Update through October of 2021

In the beginning of October, congress voted to extend the government’s borrowing. This raise in the debt ceiling avoided a government shutdown which could have been troublesome for the country and the stock market. Towards the end of the month of October, the government appeared close to passing a $1.2 trillion infrastructure bill. House Democrats are also hoping to pass a separate $1.7 trillion social spending bill. While this is still being debated in Washington, it appears the infrastructure bill is more likely to pass than the separate $1.7 trillion spending bill at this time. This potential government spending provides stimulus to the economy. This stimulus combined with strong corporate earnings allowed stocks to rebound and advance to new highs with the S&P 500 returning 7% for October.Additionally, the tech heavy NASDAQ advanced 7.3% with mid and small cap stocks advancing 5.9% and 4.2%, respectively.

2021 Perspective

Volatility in the stock market can lead investors to make mistakes while not focusing on the larger picture. The last bull market saw the S&P 500 index return greater than 400% over an almost 11 year run from the bottom of the market dip in March of 2009. What we know is that stocks did not go straight up along the way and stock investors had to stomach many ups and downs to achieve this return. The current bull market has returned roughly 93% from the bottom on March 23rd of last year. While it’s difficult to predict the future, this bull market ending in the near term appears unlikely. Keeping a longer-term perspective and thinking about where we are in this next market cycle leads you to remain invested in stocks knowing that we’re more likely in the beginning or middle of this next bull market as opposed to the end. The expectation should be that stocks will go down at times but you should also expect to realize your returns in the long run by simply remaining invested. At CRA Financial, we also focus on each client’s after-tax return. Taking into account a client’s tax profile allows us to customize a portfolio for you while remaining focused on how any changes can affect your taxes. From our CRA Investment Committee, we thank you for your confidence in our team.

Respectfully Submitted,
CRA Investment Committee

Matt Reynolds CPA, CFP®
Tom Reynolds, CPA
Robert T. Martin, CFA, CFP®
Gordon Shearer Jr., CFP®
Jeff Hilliard, CFP®, CRPC®
Joe McCaffrey

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