3Q2021 Market Summary
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Financial markets experienced increased volatility during the third quarter of 2021, but most asset classes ultimately ended about flat to down slightly during the period. In the US, corporate earnings growth remained strong compared to last year, but the specter of cost-inflation and higher taxes weighed on stock prices. Several companies recently indicated that earnings growth may slow over the next few quarters as the economy works through supply chain bottlenecks that are placing upward pressure on inflation, which was tracking at just over 5% through August. This increases the possibility of higher interest rates in the future. Also placing upward pressure on interest rates was the Federal Reserve’s recent indication that it may begin to taper its monthly purchase of $120 billion of bonds as early as November of this year.
Outside of the US, emerging markets were especially challenged due to ongoing regulatory concerns in China along with the technical default of one of its largest homebuilders, which many feared would lead to broader issues in debt markets.
Strong earnings growth in the quarter combined with mostly flat equity prices resulted in a slight improvement in valuations for stocks. That said, we believe most asset classes remain fully valued. For example, the forward price-to-earnings ratio of 20.1 times earnings for the S&P 500 Index is above the five-year average of 18.3 times earnings, according to FactSet. Against this backdrop, we continue to believe that an appropriate asset allocation, diversification and long-term focus on high-quality companies trading at relatively attractive valuations will serve clients well.
Equities struggled during the back half of the third quarter of 2021, resulting in declines for some equity asset classes, but flat performance for others. The S&P 500 Index returned 0.6% during the quarter, however the Russell 2000 Index of small capitalization stocks declined 4.4%. Healthcare, technology, and financial sectors generated small gains during the quarter, while the industrial, energy, and basic material sectors saw modest declines.
Outside of the US, emerging markets struggled due to a variety of economic and regulatory concerns in China. The MSCI Emerging Markets Index fell 8.1% during the quarter. Non-US developed markets, measured by the MSCI EAFE Index, dipped 0.4%.
Interest rates fell early during the quarter, but rose in September, resulting in rates that were largely unchanged during the three-month period. The Bloomberg US Aggregate Bond and Bloomberg US Corporate Bond indexes were effectively flat during the past quarter. High yield bonds fared slightly better, generating a 0.9% return over the past three months. Municipal bonds declined slightly, with the Bloomberg Municipal index falling 0.3%.
Commodities were a mixed bag during the quarter. The Bloomberg Commodity Index rose 6.6%. Oil prices held tight during the quarter and ended unchanged around $75 for a barrel of West Texas crude oil. Gold prices fell slightly in the quarter with the Dow Jones Gold Index dropping 1%.
The Standard & Poor’s 500 Index is an American stock exchange market index based on the market capitalizations of 500 large companies having common stock listed on the NYSE or NASDAQ. The S&P 500 index components and their weightings are determined by S&P Dow Jones Indices.
The Russell 1000 Growth Index is a broadly diversified index predominantly made up of growth stocks of large U.S. companies.
The Russell 1000 Value Index is a broadly diversified index predominantly made up of value stocks of large U.S. companies.
The Russell 2000 Index is a small-cap stock market index of the bottom 2,000 stocks in the Russell 3000 Index. The index is maintained by FTSE Russell, a subsidiary of the London Stock Exchange Group.
The Russell Microcap Index measures the performance of the microcap segment of the U.S. equity market. It includes 1,000 of the smallest securities in the Russell 2000 Index based on a combination of their market cap and current index membership and it also includes up to the next 1,000 stocks.
The MSCI EAFE Index is a stock market index that is designed to measure the equity market performance of developed markets outside of the U.S. and Canada.
The MSCI Emerging Markets Index is an index designed to measure equity market performance in global emerging markets.
The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market.
The Bloomberg Barclays US Corporate Bond Index measures the investment grade, fixed-rate, taxable corporate bond market. It includes USD denominated securities publicly issued by US and non-US industrial, utility and financial issuers.
The Bank of America Merrill Lynch High Yield Bond Index tracks the performance of below-investment-grade U.S. dollar-denominated corporate bonds publicly issued in the U.S. domestic market.
The Bloomberg Barclays U.S. Municipal Index covers the USD-denominated long-term tax exempt bond market. The index has four main sectors: state and local general obligation bonds, revenue bonds, insured bonds and prerefunded bonds.
The LBMA Gold Price Index is the global benchmark for unallocated gold and silver delivered in London.
The West Texas Intermediate (WTI) oil, also known as Texas light sweet, is a grade of crude oil used as a benchmark in oil pricing. This grade is described as light because of its relatively low density, and sweet because of its low sulfur content.
Bloomberg Commodity Index (BCOM) is calculated on an excess return basis and reflects commodity futures price movements.