In this latest installment of our quarterly newsletter, we share our observations on the third quarter of 2021 and our outlook for the remainder of the year. Click here to go to the full report on our website. Following are highlights:
- The third quarter of 2021 began with renewed hope for the return to some “normalcy,” but the rise of the highly contagious Delta variant of COVID-19 over the summer created some setbacks.
- U.S. real GDP growth surged in the first two quarters of 2021, at 6.3% and 6.6%, respectively. Although GDP is expected to slow to 5.5% in the third quarter and 3.9% in the fourth, the rate of economic growth in the United States remains strong.
- The U.S. unemployment rate, which peaked at 13.1% in the second quarter of 2020, has fallen steadily to 4.8% in September 2021 and is projected to decline further to 4.0% in 2022.
- Wage growth is also at its highest in two decades, as employers have had to compete for fewer workers due to pandemic-related retirements and work disincentives from Federal relief payments, among other factors.
- Still, there are economic headwinds which accelerated during the third quarter. Supply chain disruptions, particularly in the semiconductor and energy sectors, continue to ripple through the economy. The surge in demand over the last year, for everything from homes to cars to appliances, has resulted in logistical bottlenecks and supply shortages around the globe. Although we expect these supply chain disruptions to ease in the coming months, they have already led to a noticeable spike in inflation in many sectors.
- Core CPI, which strips out more volatile food and energy prices, rose to 4.0% year-over-year in September, though it is expected to decline to a more moderate 2.5% in 2022 as supply-demand metrics come more into balance.
- After surging 103% from its pandemic low point 18 months ago, investors saw the S&P 500 take a pause in the third quarter of 2021. The total return for the S&P in the third quarter was just 0.6%, compared to 6.2% in the second quarter. For the month of September, the index declined 4.7%, the first negative return month in 2021. Despite the pullback in September, the S&P 500 was still up an impressive 15.9% year-to-date, reflecting the fundamental strength of corporate earnings and the overall economy.
- Overall market volatility, as measured by the CBOE Volatility Index, or VIX, hit a high of 25.7 in mid-September, its highest level since March of 2021. Driven largely by fears of higher interest rates and rising inflation, market volatility seems likely to stick around for the near term.
- The Federal Reserve signaled in September that it will likely begin tapering its $120 billion monthly bond purchasing program by the end of 2021, rather than in early 2022. This accelerated timetable, though widely expected, boosted Treasury yields back above 1.6% for the first time since May 2021.
- In addition to monetary policy, fiscal policy has been a key feature of the economic recovery in the United States. From the massive fiscal stimulus measures passed by U.S. lawmakers during the pandemic, to the current proposed infrastructure legislation being debated in Congress, U.S. consumers and U.S. businesses have benefited greatly from increased government spending.
- Where fiscal policy goes from here remains unclear. While the bipartisan $1 trillion infrastructure bill seems likely to pass, the larger $3.5 trillion human infrastructure bill seems destined for significant cuts, due to concerns over exploding government deficits and debt.
- The Biden tax proposals, which are designed to raise revenue to pay for his infrastructure bills, also face great uncertainty. However, all signs point to higher taxes for high income earners. The good news is that the current proposal does not include an elimination of the step-up in cost basis, which protects inherited appreciated assets from capital gains taxes.
- In our view, the outlook for U.S. equities remains positive. Stock valuations are elevated but not unreasonable given a backdrop of low interest rates and strong corporate earnings. We believe a continuation of economic expansion should underpin stocks as we move through the rest of this year and into 2022.
- We continue to manage client portfolios with a cautious eye toward rising rates and inflation. We also continue to look for pockets of value in an otherwise fully valued market. Fortunately, we are still able to find both equity and income investments that we believe will provide solid returns over the long term.
- We are pleased to announce that Steve LaRosa, CFA, has joined Edgemoor as a Director and Senior Portfolio Manager. Steve has more than 20 years of experience as an investment advisor. Most recently, Steve was a Senior Portfolio Manager at Bank of America Private Bank, where he was responsible for managing over $1 billion in client assets. Please join us in welcoming Steve to the Edgemoor team.
The Edgemoor Team
