Stocks Flat in Q3, with Many Factors Impacting Markets
There were a number of dynamics impacting markets throughout the third quarter, but when all was said and done, the S&P 500 ended the quarter relatively flat, returning +0.23%. This represents the sixth consecutive quarter of positive gains.
On the positive side, ongoing easy financial conditions, accommodative monetary policies, pent-up demand, corporate earnings much stronger than anticipated, corporate buybacks, and retail investor inflows all helped buoy the market. On the other hand, increasing concerns around peak policy, peak growth and peak earnings weighed on market sentiment. The spread of the Delta variant, which caused a larger spike in cases and has lasted longer than many had anticipated, led to negative revisions to economic forecasts and weighed on reopening momentum. Government shutdown and debt ceiling concerns also came to the fore towards the end of the quarter.
Evergrande Unlikely to Pose a Systemic Risk
Strong Corporate Earnings
Core Bonds Flat as Yields Rise
We are broadly constructive on the outlook for stocks, as we believe still accommodative policies may help to underpin ongoing appreciation, albeit at a moderated pace relative to that experienced earlier in the year. We also anticipate increases in volatility as the Fed’s accommodative policies wear off and we transition back towards a more “normal” stock market environment. We are well prepared for such an environment.
Recent Fed policies have arguably contained volatility since last year’s COVID driven March sell-off. But volatility is par for the course for the stock market: the average intra-year decline for the S&P 500 since 1980 has been -14.3% and stocks historically experience multiple sell-offs of -5% in any given year. Despite this – and more often than not – stocks tend to post positive returns: the S&P 500 has ended 31 of the last 41 years in positive territory. Indeed, we hold a positive long-term outlook for the stock market and believe any increase in market fluctuations may offer an opportunity, allowing us to more effectively rebalance across our client accounts.
We anticipate bond yields may move higher from current levels and have positioned our core fixed income allocations with less duration risk (interest rate sensitivity) than the broad bond market. We believe our fixed income allocations are well-positioned and our direct investment strategies may continue to generate attractive yield, low correlation to the stock market, and low levels of interest rate risk.
Overall, we continue to focus on long-term fundamentals and believe our portfolios are well-positioned to continue to meet the long-term financial goals of our clients.
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