Markets wobble as the recovery persists: Reflections for third quarter 2021

After a strong first half of the year, global stock markets experienced volatility in the third quarter and finished the quarter marginally lower.

Although the economic recovery persisted, lingering concerns regarding the Delta variant, inflation and the Federal Reserve setting the stage for potentially less accommodative monetary policy weighed on sentiment.

•  The domestic economic recovery continued during the quarter, albeit at a slower pace. According to the Labor Department, the U.S. economy added 235,000 jobs in August following an upwardly revised robust payroll gain of 1.1 million jobs in July. The unemployment rate fell to 5.2%, and employer demand for labor stayed strong.1

The consumer remained on solid footing as the Commerce Department reported that spending on goods and services rose 0.8% in August from the prior month. As consumer spending accounts for over two-thirds of domestic economic activity, it is crucial to the pace of the recovery.2

•  Inflation concerns continued during the quarter. Federal Reserve Chairman, Jerome Powell, recently conceded that inflation appears to be persisting longer than initially expected, but maintained that, “The current inflation spike is really a consequence of supply constraints meeting very strong demand. And that is all associated with the reopening of the economy, which is a process that will have a beginning, middle and an end.”3

Click here to gain more context for the recent elevated inflation readings.

•  At the September Federal Open Market Committee (FOMC) meeting, the Federal Reserve set the stage for potentially less accommodative monetary policy. Although no exact details on timing were announced in regards to the Fed tapering its $120 billion in monthly purchases of Treasury and mortgage-backed securities, the Committee revealed, “If progress continues broadly as expected, the Committee judges that a moderation in the pace of asset purchases may soon be warranted.”4

As we noted in The false promise of changing course, while it’s always difficult to know what will make headlines next, establishing and maintaining a portfolio that is constructed to provide highly diversified global exposure to various asset classes is key to long-term investing success.

Third quarter returns

Third quarter returns 2021
Returns shown in the chart above are for third quarter 2021.

Source: Morningstar®, data as of September 30, 2021. See disclosure for more information.

•  Equity markets were modestly down in the third quarter. Among stock segments, U.S. large cap growth stocks still managed a positive return and were the top performer during the quarter, returning +1.2%. On a year-to-date basis, however, U.S. small cap value stocks led all asset classes, returning +22.9%.

In U.S. markets from a style standpoint, large cap value stocks trailed large cap growth stocks, while small cap value stocks outpaced small cap growth stocks during the quarter.

Developed international and emerging markets lagged U.S. markets during the quarter. A strengthening U.S. dollar relative to international currencies detracted from returns for U.S. investors in international markets.

Despite third-quarter weakness, developed international markets have returned a solid 8.3% year-to-date. Emerging markets dipped slightly into negative territory for the year, largely being dragged down by China. Chinese stocks have struggled this year as the government has increased regulatory scrutiny of certain sectors, including technology and real estate. The situation was further exacerbated by news of an imminent debt default by Evergrande, a large Chinese real estate developor, toward the end of September.

World asset classes

Returns for the third quarter and YTD 2021:

World asset classesSource: Morningstar®, data as of September 30, 2021. See disclosure for more information.

•  Investment-grade and below investment-grade fixed income sectors experienced mixed performance in the third quarter. Investment-grade bonds were largely flat, high-yield bonds experienced positive performance and emerging markets bonds declined this quarter.

The U.S. treasury yield curve remained relatively unchanged during the quarter. Two-year treasury yields rose 0.03% over the course of the quarter, while 10-year treasury yields rose 0.07%.5

Municipal bonds slightly trailed their taxable counterparts during the quarter but have experienced positive returns year-to-date.

U.S. corporate and high-yield credit spreads modestly widened during the third quarter. High-yield bonds still outperformed investment-grade bonds during the quarter.6

Need assistance?

Do you have any questions about how these third-quarter highlights impact you, your finances or your investment portfolio? Contact a Wipfli Financial advisor for assistance.

 

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Reflections for third quarter 2021

U.S. Stock Market: Russell 3000 Index
International Developed Stocks: MSCI EAFE NR Index
Emerging Markets Stocks: MSCI EM NR Index
U.S. Bond Market: Bloomberg Barclays Aggregate Index
Emerging Markets Bonds: JPM EMBI Global Diversified TR Index
Large Cap Value U.S. Stocks: Russell 1000 Value Index
Large Cap Growth U.S. Stocks: Russell 1000 Growth Index
Small Cap Value U.S. Stocks: Russell 2000 Value Index
Small Cap Growth U.S. Stocks: Russell 2000 Growth Index
Int-Term Municipal Bonds: BBgBarc Municipal 1-10Y Blend 1-12Y Index
High Yield U.S. Bonds: ICE BofA BB-B US CP HY Constrained Index

Return data represent past performance and are not indicative of future results. Historical returns of indices do not reflect applicable transaction, management or other applicable fees, the incurrence of which would decrease historical performance results. Index information has been compiled by Wipfli Financial from sources Wipfli Financial deems reliable, but has not been independently verified. Historical performance results for investment indices and/or categories have been provided for general comparison purposes only. Indices are unmanaged. It is not possible to invest directly into an index. Any charts and graphs represented herein are for informational purposes only and cannot in and of themselves be used to determine which securities to purchase or sell, or when to purchase or sell securities.

Source: © [2019] Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results

Wipfli Financial Advisors, LLC (“Wipfli Financial”) is an investment advisor registered with the U.S. Securities and Exchange Commission (SEC); however, such registration does not imply a certain level of skill or training and no inference to the contrary should be made. Wipfli Financial is a proud affiliate of Wipfli LLP, a national accounting and consulting firm. Information pertaining to Wipfli Financial’s management, operations, services, fees and conflicts of interest is set forth in Wipfli Financial’s current Form ADV Part 2A brochure and Form CRS, copies of which are available from Wipfli Financial upon request at no cost or at www.adviserinfo.sec.gov. Wipfli Financial does not provide tax, accounting or legal services. The views expressed by the author are the author’s alone and do not necessarily represent the views of Wipfli Financial or its affiliates. The information contained in any third-party resource cited herein is not owned or controlled by Wipfli Financial, and Wipfli Financial does not guarantee the accuracy or reliability of any information that may be found in such resources. Links to any third-party resource are provided as a courtesy for reference only and are not intended to be, and do not act as, an endorsement by Wipfli Financial of the third party or any of its content or use of its content. The standard information provided in this blog is for general purposes only and should not be construed as, or used as a substitute for, financial, investment or other professional advice. If you have questions regarding your financial situation, you should consult your financial planner, investment advisor, attorney or other professional.
Rafia Hasan

CFA, CFP® | Principal, Chief Investment Officer

Rafia Hasan, CFA, CFP®, is the Principal and Chief Investment Officer for Wipfli Financial Advisors, based in Chicago, IL. Rafia leads Wipfli Financial's Investment Committee and has a deep knowledge of the financial markets, specifically in the areas of alternative investments and private equity. She also specializes in personal financial planning and estate planning for women investors.

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Markets wobble as the recovery persists: Reflections for third quarter 2021

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