Summary of 3Q/2021: Not Out of the Woods Yet…
As noted in the 10/1/21 Wall Street Journal, the S&P 500 rose for a sixth straight quarter, despite dropping 4.8% in September, a month that highlighted the dysfunctionality of our government combined with a reminder from China of the risks inherent in emerging market companies (Evergrande). As of now, it does not appear that investors in Evergrande’s securities will receive any sort of bailout, and why should they?
We now appear to be past the peak of the fourth wave of COVID, and nobody is ruling out the possibility of a fifth wave for Winter. One important piece of good news is the announcement from Merck and Ridgeback Biotherapeutics that their antiviral COVID treatment pill Molnupiravir reduced hospitalizations and deaths by half.
Inflation continues to be a concern with the CPI as of 8/31/21 clocking in at 5.3% higher compared to a year ago. Of course, all of us can think of items whose costs have risen by way more than 5.3% (e.g., the price we pay for sugar is up about 20%, which means our hummingbird hobby is more costly but still well worth it).
The bond market continues to forecast breakeven inflation at about 2.4% for the next decade, and Federal Reserve Chair Jerome Powell now appears to be less dismissive of inflation compared to a few months ago.
Bond yields essentially took a round trip during the third quarter with the 10-year Treasury Note starting at 1.45%, falling as low as 1.19%, and climbing back up to 1.52%.
While we have avoided the immediate possibility of a federal government shutdown at least until December 3rd, the debt ceiling limit has not been raised. According to Treasury Secretary Janet Yellen, the deadline for addressing this is October 18th at which point we face the possibility of a default on US Treasury securities. Make no mistake—a default would be, in the words of Yellen, “a calamity for the financial markets”. For now, the $1.2 trillion infrastructure and $3.5 trillion reconciliation bills appear to be in limbo.
The supply chain issues that we heard so much about in 2020 have not gone away but appear, in fact, to be getting worse. Just search “supply chain” on Google News and you will see headlines and bylines like the following from The Washington Post.
“Ships wait off the California coast, unable to unload their cargo.”
“Truckers are overworked and overwhelmed, often confronting logjams.”
“Rail yards have also been clogged, with trains at one point backed up 25 miles outside a key Chicago facility.”
And of course, Costco is once again limiting purchases of toilet paper, paper towels, and bottled water. The below is from our local Costco on 10/3/21 at 10:20 AM. Not a roll of toilet paper or paper towels in sight! Needless to say, the chip shortage continues to throttle the automobile industry, and the Wall Street Journal expects it to continue well into 2022 (“Car Companies Buckle Up for Extended Chip Shortage”, 9/30/21).
The table below summarizes the estimated returns for various asset classes based on the performance of Vanguard index funds. Please note that they do not necessarily represent the returns of the funds or portfolios utilized by Clarity Capital Advisors.
Asset Class Ticker Used 3Q/21 Return YTD 9/30/21 Return
US Total Market VTSAX -0.1% 15.2%
US Large Growth VIGAX 1.4% 14.9%
US Large Value VVIAX -1.0% 15.7%
US Small Growth VSGAX -3.2% 5.1%
US Small Value VSIAX -2.2% 20.4%
US Real Estate VGSLX 0.7% 22.2%
International VTMGX -1.6% 8.2%
Emerging Markets VEMAX -7.0% 1.3%
US Bond Market VBTLX 0.1% -1.6%
US TIPS VAIPX 1.7% 3.4%
US stocks overall were flat for the quarter which means that their year-to-date returns remain well above historical averages. The one laggard category for both the quarter and year-to-date is small growth stocks. Small value and real estate continue to lead in year-to-date returns, which is quite fitting since these asset classes were especially hard hit in 2020.
Regarding large growth, it used to be that you could have a blindfolded monkey throw a dart at a list of the largest technology companies (FAANGs+Tesla) and you were certain to beat the market. That is no longer the case. On a year-to-date basis, Apple, Tesla, and Amazon have underperformed the market while Microsoft, Google, and Facebook have outperformed. Sorry, but you will never hear us call it a “stock-picker’s market.”
The small negative return of international stocks is entirely explained by the strengthening of the dollar against other currencies, and the larger negative return of emerging markets is attributed to the Evergrande debacle. Specifically, the iShares MSCI China ETF (MCHI) lost 18.1% for the quarter.
Once again, inflation-protected bonds (TIPS) outperformed nominal (non-inflation-protected) bonds. We have always considered the former to be good diversifier against the latter.
As for what you should do in this environment of uncertainty (both political and economic), our advice, as always, is to grit your teeth and stay the course.