A tremendous amount happened this past quarter at least from a geopolitical perspective. As far as the market is concerned nothing significant happened. The DOW opened July at 34,507 and opened on September 30th at 34,467. If you closed your eyes on July 1 and didn’t open them until October 1, you might think the market didn’t move. We all know better than that. The markets moved up, down, and ultimately sideways in Q3. At one point in the quarter, the S&P 500 was up over 5%, then a selloff in September resulted in the S&P 500 finishing essentially flat for the quarter.
As you can see, despite relatively poor returns from Small Cap Stocks and Emerging Market stocks the rest of the market produced an essentially flat quarter. There are a variety of potential reasons for this, however, our view is simply there was no reason to expect great returns last quarter.
At the start of Q3, the market had been on a rocket ship trajectory for over a year. A good portion of that growth was a rebound from the covid crash. Now that we are in a nearly normalized economy, market gains are going to need to be a result of improving economic conditions, not just “normalizing economic conditions”.
There are certainly headwinds to economic growth going forward. Washington appears to be stalemated on additional spending, vaccine mandates could cause a labor shortage, and inflation remains a concern of ours.
I wrote in detail about inflation in my last market update but I think it is worth exploring again albeit briefly.
The above 3 year inflation chart shows that we have continued to see an increase in inflation even after the initial price surge following the covid crash. As a result of rising costs and a difficult labor market, employers have been raising wages quite significantly in an effort to fill open positions. Unfortunately, when we overlay inflation with average wages, it appears that workers are seeing minimal (if any) net gains to their real wages.
Investors that have become accustomed to double digit growth each year may find it frustrating or concerning when markets are flat or volatile. It's important to remember that growth is not always easy and economic growth (and by extension market growth) is cyclical. Periods of stagnant returns are completely normal and should be expected. Staying invested for the long term is critical and sticking to a financial plan is the best way to improve your financial condition.
Despite the frustrating Q3, this year has been great for diversified investors. Most stock indexes are up significantly and the bond market is down minimally. As we look to close out the year, we will be watching inflation, consumer holiday spending, and the unemployment rate. These metrics will all give us an idea of how healthy the consumer is and by extension the economy. Overall, we are not overly optimistic about a huge finish to the fourth quarter nor are we concerned about a large correction. We may simply end up with more wheel spinning to finish out the year, and if so, that is perfectly acceptable. The market will grow over the long term and we are willing participants in that compound appreciation.
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Written by: Brice Carter