2021 4th Quarter Outlook
Review of 3rd Quarter
U.S. stocks slowed their growth during the third quarter, only rising by 1%. They also experienced a high degree of volatility in September, caused by a combination of concern regarding Federal Reserve Bank policy, tax increases, and political machinations over the debt ceiling. International stocks lagged behind, with developed markets falling by 3% and emerging markets declining by 8%. Bond returns were flat. *
Current and Future Environment
The broad overall economic statistics are still favorable. Second quarter real GDP rose at an annual rate of 7%, and unemployment for September fell to 4.8%, compared to 5.9% in June.** Our focus on projected corporate earnings also shows us favorable results -- over the next 15 months, earnings are projected to rise at an annual rate of 14%.***
And yet, despite these rosy numbers, there is still a great deal of unease about the economy, which has resulted in the forementioned increase in market volatility. Some of this apprehension is because of the supply chain difficulties that we’ve frequently seen cited in the press – anyone trying to buy appliances or cars can attest to those problems. Another factor is concern about the impact of tax increases and tighter monetary policy on economic growth. Finally, concerns about inflation are not going away.
Specifically focusing on inflation, in our last quarterly outlook we spent some space discounting fears of inflation. However, we want to clearly differentiate between views of short-term versus long-term inflation, and small versus large increases. I first lived on my own in Chicago in the 1970s, which means I will always have a deep concern of inflation and February temperatures in the teens. But while short-term inflation rates are high because of labor shortages and supply chain effects, our belief is the rate will somewhat subside. There is a huge difference in the effect on the economy between an inflation rate in the 3%-4% range and the long-term double-digit inflation I experienced in my youth.
Summary
We believe over the long-term, a diversified portfolio of stocks is still the best place to invest your money. But when doing so it is vital to be aware of the risks. Over the past decade, the major shocks in the stock market have been followed by relatively swift recoveries of a couple of years or less. That doesn’t always happen, and it is very possible that the next downturn might not have the immediate recovery we’ve gotten used to. The reason why we typically recommend a diversified portfolio of stocks and bonds, not because we’re excited by 2% bond yields, but because bonds dampen overall portfolio volatility. As is true with most things in life, balance is key.
*Source of returns is Morningstar, Inc. Past performance is not indicative of future results;
** Sources of economic data are the Bureau of Economic Analysis and the Bureau of Labor Statistics;
*** Source: S&P Dow Jones Indices
This update is provided by Savant Investment Group, LLC (“SIG” or the “Firm”) for informational purposes only. Investing involves the risk of loss and investors should be prepared to bear potential losses. Past performance may not be indicative of future results and may have been impacted by events and economic conditions that will not prevail in the future. No portion of this commentary is to be construed as a solicitation to buy or sell a security or the provision of personalized investment, tax or legal advice. Certain information contained in this report is derived from sources that SIG believes to be reliable; however, the Firm does not guarantee the accuracy or timeliness of such information and assumes no liability for any resulting damages. Any reference to a market index is included for illustrative purposes only, as it is not possible to directly invest in an index. Indices are unmanaged, hypothetical vehicles that serve as market indicators and do not account for the deduction of management fees or transaction costs generally associated with investable products, which otherwise have the effect of reducing the performance of an actual investment portfolio.
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