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“Shelves and jobs” reflect the state of the economy 

October 5, 2021

and Laura Kuntz

Heading out for a shopping trip can tell you a lot about the state of the economy. It’s all about shelves and jobs.

From big box stores to local mom and pop shops, all are struggling to stock shelves,1 and many have “immediate hiring” ads at their entrance or are enticing workers with sign-on bonuses.2

This isn’t just in the United States. British soldiers are serving as temporary truck drivers, delivering fuel to gas stations with pumps running dry.3

We’re seeing a unique confluence of events. Rapid economic recovery from the pandemic, a record-setting labor market4 and strong U.S. consumer spending are clashing with supply chain disruptions caused by pandemic shutdowns, materials shortages and extreme weather over the past year.

Strong demand and short supply are the central themes this past quarter. We expect this push-pull paradigm to be the central focus of consumers, companies, the Fed and governments in the year ahead.

Market returns in Q3 2021

The S&P 500 started the quarter strong.5 In September — generally a gloomy month for markets6 — it closed down -4.7%. That drop ended the second-longest positive market return streak (10 months) without a 5%+ pullback in 20 years.7 The quarter ended with a positive 0.58% return.

Chart showing market pullbacks since October 2020 Other equities fared worse than the S&P 500. U.S. small cap stocks, measured by the Russell 2000 Index, retreated -4.36%.8 Emerging markets were down -8.09%, while developed international markets closed down -0.45%.9

What broke the winning streak? Investors reacted to several headlines:

  • Rising Treasury yields
  • Tight commodity markets, inflation and energy costs possibly impairing growth forecasts
  • Fears of a contagion effect from a possible default of one of China’s most-indebted real estate developers10
  • The debt ceiling and corporate tax increases
  • Lowering company earnings estimates due to supply chain disruptions

What’s our take?

With the S&P 500 up 94.7% since the March 2020 low, we think some turbulence is normal as markets have cruised higher given the healthy fundamental backdrop for U.S. equity markets. U.S. equity markets are

bolstered by above-trend corporate earnings growth, rising dividends, low interest rates, a strong consumer, a tight employment market and companies spending more on capital expenditures and rebuilding inventories.11

Energy and commodities have been the best performing asset class of the year, up 54.64% and 29.09% as companies outbid each other over assets. Certain markets have seen even more extreme price distortions, like the Eurozone, where natural gas prices have surged 500%+ over last year, driven by a perfect storm of depleted inventories, unregulated energy markets and higher demand from China. In the U.S., fuel demand has rebounded to pre-pandemic levels, with prices driven higher by the global supply crunch and natural disasters like Hurricane Ida, which impaired U.S. production capacity.

Fed Chairman Jerome Powell explained to Congress last week that he expects inflation to stay higher (4.2%) until later next year, before returning to a normalized 2.2% level.12

What does all of this mean for investors?

Higher inflation is a risk to consumers, corporate earnings and economic growth. By expanding our allocation to real assets, we’ve worked to temper our portfolios to inflation. We also think that as companies catch up to “restock their shelves,” this will be broadly supportive for markets.

Bonds, rates and the Fed

The U.S. bond market closed +0.05% for the quarter, while municipal bonds closed down -0.27%.13 Municipals have outperformed the broader bond market year-to-date as U.S. investors have sought tax-free income against a backdrop of less municipal debt. The 10-year treasury hit 1.52%, the highest level since June, indicating that investors expect relatively higher inflation over the intermediate term.14

Chart showing Treasury yields since September 2019

The two most important questions for bond investors for the quarter:

  • Will the Fed scale back its bond buying program this year (instituted at the height of the pandemic to stabilize asset prices)?
  • Will the Fed hike short term interest rates in 2022/2023 (or sooner) to slow inflation?

At the September Federal Open Markets Committee, the Fed indicated it will scale back its bond purchases by mid-2022, with a forecast of hiking rates in 2022-2023. The Fed will likely adjust course as new inflation and employment data comes to light. 15

While this could cause longer-term bond rates to rise further this next year, we think interest rates will be moderated long-term by higher demand for U.S. debt than available supply.16

We continue to view bonds as the best “port in the storm” for a diversified portfolio, even with a backdrop of higher rates. With our expectation of higher rates over the next 12-24 months and higher inflation for longer, we have positioned our bond portfolios with a preference for intermediate term, higher quality bonds (less sensitive to higher rates) and an allocation to Treasury inflation-protected securities (TIPs) that benefit from higher inflation against a backdrop of lower rates.

Key takeaways

We think the “shelves and jobs” theme will continue as the central focus of markets — from equities to commodities to bond investor expectations.

We’ve positioned portfolios to potentially benefit from this theme. Our positive outlook on global economic growth, the job market and the continued global recovery underlines our preference for allowing equities to run up to 5% over target.

We expect some fits and starts as the global economy continues to recover and digest new information about inflation and central bank policy.

Q3 and YTD returns of multiple indexes

Footnotes

1. Bloomberg and MarketWatch
2. Bloomberg and The Guardian
3. NPR
4. Reuters
5. See definitions for S&P 500 Index
6. CNBC and NASDAQ
7. Return information from Tamarac, FactSet and JP Morgan Research
8. See definitions for Russell 2000 Index
9. See definitions for MSCI EAFE Index and MSCI Emerging Markets Index
10. FactSet
11. Raymond James Research
12. NPR
13. See definitions for Bloomberg Barclays U.S. Aggregate Bond Market Index and Bloomberg Barclays U.S. Municipal Bond Market Index
14. Raymond James research
15. Bloomberg
16. JPMorgan Research

Important information

The information on this and the previous page is not intended as a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Expressions of opinion are as of this date and are subject to change without notice. This information is not intended for a solicitation or an offer to buy or sell any security referred to herein. Investments mentioned may not be suitable for every investor. Investing involves risk and investors may incur a profit or a loss, including the loss of all principal. Please note that international investing involves special risks, including currency fluctuations, differing financial accounting standards, and possible political and economic volatility. This may result in greater share price volatility. These risks are heightened in emerging markets. Diversification does not assure profit or protection against loss. Bond prices and yields are subject to change based upon market conditions and availability. If bonds are sold prior to maturity, you may receive more or less than your initial investment. Holding bonds to term allows redemption at par value. Bond prices and interest rates have an inverse relationship. Dividends are not guaranteed and must be authorized by the company’s board of directors. No one graph, chart, formula, or software can in and of itself be used to determine which securities to buy or sell, when to buy or sell them, or assist any person in making decisions as to which securities to buy or sell or when to buy or sell them. Any chart, graph, formula, or software used is limited by the data entered and the created parameters. Market performance results were obtained from Tamarac.

Definitions

Bloomberg Barclays U.S. Aggregate Bond Market Index: A representation of SEC-registered, taxable, and dollar denominated securities. The index covers the U.S. investment grade fixed rate bond market, with index components for asset-backed securities, government and corporate securities, and mortgage pass-through securities. Must be rated investment grade (Baa3/BBB- or higher) by at least two of the following rating agencies: Moody’s, S&P, Fitch; regardless of call features have at least one year to final maturity and have an outstanding par value amount of at least $250 million.

Bloomberg Barclays U.S. Municipal Bond Market Index: Covers the USD-denominated long-term tax-exempt bond market. The index has four main sectors: state and local general obligation bonds, revenue bonds, insured bonds and pre-refunded bonds.

S&P 500: Representing approximately 80% of the investable U.S. equity market, the S&P 500 measures changes in stock market conditions based on the average performance of 500 widely held common stocks. It is a market-weighted index calculated on a total return basis with dividend reinvested.

Russell 1000 Growth Index: Russell 1000® Growth Index measures the performance of the large cap growth segment of the US equity universe. It includes those Russell 1000® companies with higher price-to-book ratios and higher forecasted growth values. The Russell 1000® Growth Index is constructed to provide a comprehensive and unbiased barometer for the large-cap growth segment. The index is completely reconstituted annually to ensure new and growing equities are included and that the represented companies continue to reflect growth characteristics.

Russell 1000 Value Index: The Russell 1000® Value Index measures the performance of the large cap value segment of the US equity universe. It includes those Russell 1000® companies with lower price-to-book ratios and lower expected growth values. The Russell 1000® Value Index is constructed to provide a comprehensive and unbiased barometer for the large-cap value segment. The index is completely reconstituted annually to ensure new and growing equities are included and that the represented companies continue to reflect value characteristics.

Russell 2000 Index: The index measures the performance of the small-cap segment of the US equity universe. It is a subset of the Russell 3000 and includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership.

MSCI EAFE (Europe, Australasia, Far East) Index: A free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. As of June 2, 2014, the index consists of 21 developed market country indices: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and the United Kingdom.

MSCI Emerging Markets (EM) Index: A free-floating index offered by Morgan Stanley that captures mid and large capitalization stocks across more 26 countries including many in S. America, Eastern Europe, Africa, the Middle East, and parts of Asia, including Indonesia, the Philippines, and Taiwan.

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