The good news is U.S. equity markets were positive in the third quarter of 2021. This is the sixth consecutive quarter of positive returns from the S&P 500 Index.
The not-so-good news is the impact of the spread of the Delta variant on performance. The increase of 0.58% was the lowest move since the first quarter of 2020. Industrial companies saw some of the worst performance in the quarter. Airlines, within the Industrials sector, were negatively impacted by slower-than-expected passenger growth and capacity issues and declined 4.23%. The Materials sector started the year out strong with a first-half performance of 14.50% but gave up some of its gains as prices for several commodities normalized and declined 3.51% in the third quarter.
The strong performers for the quarter were in the Financials and Utilities sectors. The performance of 2.74% for the Financials industry brings year-to- date performance for the sector to 29.14%, the second-best performing sector after Energy. The performance in the Financials sector comes after 2020 losses of 1.69%. Utilities took over the second slot, up 1.78% in the quarter.
Performance in foreign markets continues to trail U.S. performance. The MSCI EAFE index was down 0.35% in the quarter.
This weak performance was led by Hong Kong, down 9.41%. The Hong Kong equity markets performance reflect crackdowns by the Communist Party of China on some of the largest companies traded on Hong Kong exchanges. This regulatory tightening wiped out over $1 trillion in market cap from Chinese equities. The regulatory policies will likely have lasting effects. The Chinese markets are evolving as the economy slowly moves from a manufacturing economy to a service economy. Labor constraints will likely negatively impact manufacturing capacity. We have seen decreases in the workforce participation rate and an increase in the dependency ratio (the number of dependents between 0 and 15 and older than 65 divided by people between the ages of 15 and 65). Volatility is expected to continue through the end of the year.
A concern going forward is persistent supply chain issues. There has been a compounding domino effect of supply chain disruptions from last year. The expectation was for some resolution through 2021 but that hasn’t been the case. These issues have contributed to price increases which will be reflected in the form of tighter margins. The negative impact of tighter margins on earnings could lead to muted equity performance through the last quarter of the year. Companies in sectors and industries that are not as reliant on the manufacturing supply chains, like banks and software companies, may continue to see more robust returns.
Real wages are expected to keep rising as employers seek to entice workers. The effects of higher-than-expected wages on income statements may contribute to lower-than-expected earnings for companies.
The catalysts are not all negative. Easy monetary and fiscal policies will continue to benefit equity markets through the year. Despite coming down through the year, savings rates are still relatively high. We have a full reopening to look forward to.
As mentioned in the Economic and Market Overview, some moderation is expected in economic growth. Moderation will likely contribute to lower returns than we have seen in equity markets post-pandemic. Slower growth is not bad. This may be the opportunity companies need to grow into their valuations. You slow down for turns when driving. Slower acceleration in returns may just be the slowdown we need so we don’t rollover.
Source: BTC Capital Management, Bloomberg LP, Ibbotson Associates, FactSet, Refinitiv.
The information provided has been obtained from sources deemed reliable, but BTC Capital Management and its affiliates cannot guarantee accuracy. Past performance is not a guarantee of future returns. Performance over periods exceeding 12 months has been annualized.
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