2021 Q3 Market Update

State of the Markets

The third quarter of 2021 saw a bit of a pause as investors digested concerns about the economy, the rise in COVID cases, potential tax changes, inflation, and supply chain disruption. These concerns resulted in flat performance for the quarter, but since then (as of mid-October), the pause has been lifted and the U.S. stock market (Russell 3000) has revisited all-time highs. 

As of September 30, the global stock market (MSCI ACWI IMI) had a negative return of 1.1% for the quarter, bringing year-to-date (YTD) returns to 11.4%. The U.S. stock market (Russell 3000) was essentially flat for the quarter, with a negative return of 0.1%, reducing YTD returns to 15%. International developed markets (MSCI World ex USA IMI) were down 0.5% for the quarter, decreasing YTD returns to 9.5%. Emerging markets (MSCI Emerging Markets IMI) declined by 7.4% for the quarter, bringing YTD returns to 0.7%. Publicly traded real estate (S&P Global REIT) was essentially flat with a negative return of 0.1% for the quarter and gains of 16.9% YTD. The U.S. bond market (Bloomberg Barclays U.S. Aggregate Bond Index) was up just 0.1% for the quarter, with a YTD loss of 1.6%.

The total returns for major asset classes are below.


Trickle-Down (and Trickle-Up) Economics

Former President Reagan was a big promoter of “trickle-down economics,” with the idea that reduced taxes for corporations and the wealthy would flow through the economy and have a positive overall impact. 

Over the last 18 months, there has been significant stimulus and support from the Federal Government and the Federal Reserve. Some of economic support would qualify as trickle-down – tax relief, quantitative easing, PPP loans, and support for large companies, colleges, non-profits, state, and local governments. However, a lot of the support would be considered trickle-up – stimulus checks, tax credits, unemployment, rent and loan support. This is relatively unique in the history of government economic stimulus and is having a unique impact. 

Increased Profits
The “firehose” of relief, used by the government to put out the pandemic fire, worked. The net result, however, is that a lot of the excess money has flowed through to corporate earnings. The chart below shows actual and projected earnings of S&P 500 companies. Year-to-date earnings have increased 26.3%, which is higher than market returns. Market returns are eventually driven by corporate profits, and we are seeing justification for the significant increase in stock price over the last 18 months. 

Increased Demand
The excess money and safety protocols during the pandemic have resulted in significant increases in spending on goods versus services. This is illustrated in the charts below. These increases in spending are the drivers behind inflation and supply chain disruption. 

We need to get back to more services and less goods. 

Some of the increases in pricing will last and some will face. Supply and demand issues tend to fix themselves over time, and given what is driving inflation, it is likely not permanent. This is why many economists refer to current inflation as transitory.


China has adopted capitalism under their communist umbrella over time with great success. They have been the fastest growing economy over several decades and some of the world’s largest publicly traded companies are based in China. The Chinese Communist Party, under President Xi’s leadership, wants to retake control of things that have drifted away. This includes censoring media, increasing control of independent companies, and even recapturing control of Taiwan. 

At the same time, their banking and real estate development are showing significant risks. This is concerning for multiple reasons. China is the second largest economy; their stock market presence is significant within emerging markets; and developed countries rely on them significantly for manufacturing and supplies. 

These changes and risks have had a negative impact on Chinese stocks, which has affected emerging markets in general. The uncertainty of changes for the Chinese government is concerning but not something that can be predicted with certainty. A well-diversified portfolio should have relatively small percentage of exposure to Chinese stocks and allow investors to maintain exposure to emerging markets while diversification away from companies with higher risks.


We are happy to see stocks at or close to all-time highs. While valuations have risen, we feel like corporate earnings are closing that gap and set the stage for a good future.

As always, thank you for your trust and confidence. 

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