2021 Q3 Market Note
October 20, 2021 | Mark Borda, CPA, CFA Portfolio Manager
The U.S. stock market declined in September after a powerful recovery from a deep recession brought on by the pandemic. The September slump was attributable to a range of concerns that are increasingly demanding the market’s attention, including the China Evergrande crisis, Delta variant infection trends, elevated inflation, supply chain issues and the Federal Reserve considering scaling back monetary stimulus.
Fortunately, we spent time this summer managing risk within our client’s portfolios by paying attention to what many investors appear to have ignored in the market run-up: diversification. By designing balanced and diversified portfolios, we’ve positioned our clients to weather volatility while maintaining exposure to risk assets thus maintaining the ability to participate in potential further market upside.
U.S. bond prices were effectively unchanged during the quarter according to the total return of the Barclays US Aggregate Bond Index. For the past year, we’ve been focusing a large portion of our clients’ fixed income exposure to U.S. municipal bonds. We view municipal bonds as an attractive investment option because the interest income is often exempt from federal, and potentially state, income taxes. Municipal bonds also exhibit high credit quality; historically, municipalities exhibit repayment patterns that are stronger than those exhibited by corporate borrowers within the same credit rating categories.
We maintain a cautiously optimistic outlook on the stock market as we move through fall and into next year. We expect consumer activity, corporate earnings and the sustained impact of fiscal stimulus to continue to drive the U.S. economic expansion. However, our outlook is not without risk as we continue to monitor the lingering pandemic, inflation, federal policy and market valuations; all of which we expect to cause periodic bouts of volatility in the coming months.
Navigating the eventual transition of an economy support by stimulus to one supported by fundamentals will challenge all investment managers; but on the positive side. These shifts tend to favor active managers able to take advantage of the volatility.
We are focusing the equity portfolio in high-quality companies that exhibit predictable earnings, healthy balance sheets and executive management teams that are proven and experienced through business cycles. These companies are typically able to perform well during periods of market volatility and elevated uncertainty.
Importantly, we are increasing our focus on market valuations which are elevated. The S&P 500 Index is currently trading firmly above its twenty-year average. While we don’t expect future stock market gains to primarily be driven by further increases in valuation, we believe equities can remain expensive as long as corporate profits remain robust and the economy continues its expansion.
The investing landscape continues to be both complex and challenging. While we do not think we are at an inflection point, the market is currently traversing through a critical juncture over the coming months, as the market is increasingly met with various matters of uncertainty that call the continuity of the expansion into question. We think the increasing recognition of risk and associated volatility is healthy for the markets as it indicates altered attitudes and less complacency from market participants.
Over the coming months, we expect investors to occasionally overreact to various data-points or changes in sentiment that will cause market volatility. In such cases, we will evaluate the situation on its own merit and act in accordance with our client’s specific objectives in mind.
We are monitoring markets closely and continue to believe this is the time to exhibit a disciplined investment process. Therefore, we are maintaining a balanced approach to asset allocation, remaining diversified and periodically rebalancing.
We will continue to keep you apprised of our thoughts and welcome your feedback. Please do not hesitate to contact us if you have any questions or comments about anything we have written or otherwise.
*Opinion piece, please read Important Disclosures