WESCAP’s Q3 2021 Quarterly Commentary: Increasing Concerns of a Delayed Economic and Profits Recovery
Portfolio results for the third quarter of 2021 reflected increasing concerns of a delayed economic and profits recovery due to the Delta variant of the coronavirus, supply constraints, higher inflation, and U.S. government policy uncertainty.
These concerns had a larger negative impact on economically sensitive value stocks (S&P Value), small cap stocks (Russell 2000), foreign (EAFE) and emerging markets stocks (MSCI), which declined 1.0%, 4.4%, 0.4%, and 8.1%, respectively. Worldwide stock and bond asset allocation mutual funds (Morningstar World Allocation funds) dropped 1.2%.
Assets less economically sensitive did somewhat better. The S&P 1500 Growth index and growth stock heavy S&P 500 returned 1.6% and 0.6%, respectively, over the third quarter.
Most U.S. bond sectors produced returns between 0% and 1.1% for the quarter with high yield bonds and leveraged bank loans leading the way.
As mentioned in our last report, S&P 500 and large cap growth stocks valuations look a bit stretched at this point. Value stocks look to be more attractively priced, though some may be negatively impacted by supply chain shortages and cost pressures. Inflation, particularly energy, shipping and wages will negatively affect many firms, though some will benefit or be largely unaffected (e.g. healthcare, financials, communications).
The current debt ceiling impasse is a self-created crisis, driven by politics. Despite the rhetoric, we believe that Congress will solve the problem without any defaults. Thus, any near-term uncertainty and decline in stock and bond prices should quickly reverse when this issue is resolved. These artificial crises are almost always buying opportunities.
Much of the wage pressures and supply constraints are expected to dissipate over the next 6 months as the coronavirus and its effects retreat. Increased vaccinations and new treatments are making favorable inroads to the levels of infections and to its severity.
Despite these nearer term uncertainties and issues, the Federal Reserve is still keeping interest rates low and buying enormous amounts of bonds each month. These purchases create a lot of cash that needs to find a home, with much of this cash going into domestic stocks and other financial assets. Even a tapering of such bond purchases still leaves a lot of stimulus in place, well into 2022. While this stimulus remains in place, it will be difficult for U.S. stocks and bonds to suffer major or long-lasting declines.
As always, please feel free to contact WESCAP at (818)563-5170 or contactus@wescapgroup.com if you would like to discuss any of this further.