Global growth optimism weakened in late-3Q sending equity markets lower and Treasury yields higher. That said we continue to see opportunity for growth in the global economy in the intermediate term as supply chain bottlenecks and labor market imbalances reset and adjust for persistently higher consumer demand. Inflationary pressure and fiscal uncertainty remain the biggest concerns into year-end, and while Biden’s fiscal policies may end up weighing on growth in 2022, near-term we encourage investors to maintain risk exposures through the volatility as markets have proven to be resilient.
10 Year US Treasury vs. S&P 500 P/E (NTM) vs. S&P 500 EPS (NTM)
All eyes on inflation
- Equity markets sold-off late-3Q (especially technology stocks) as inflationary concerns pushed yields higher.
- Concerns that China may derail the global economic recovery were front and center, highlighted by President Xi’s “common prosperity” and concerns that real estate conglomerate Evergrande could collapse.
- Energy prices (WTI, nat gas) continued to rise in 3Q as supply remained constrained amid production bottlenecks.
- Biden’s “Build Back Better” bill continued to face pressure from both parties, creating concerns economic activity may face a steep drag in 2022 as fiscal support rolls off.
- The Fed reaffirmed plans to start tapering asset purchases in 4Q, driving the yield curve higher, but still well-below historic levels.
After a slow start to 3Q the quarter ended with a surge in volatility and accompanying equity market pullback. Concerns over rising persistent inflation, lingering supply chain problems, and widespread COVID variant Delta cases were enough to weigh on consumer confidence and cause many investors to decrease equity exposure. The late-quarter market decline was further exacerbated by concerns over a potential collapse of the Chinese real estate market (i.e. Evergrande) and a near definitive statement from the Fed that tapering will start in 4Q.
Headed into year-end the broad optimism around global growth that drove markets higher in 1H21 has started to soften. But despite the waning optimism we remain positive on the growth outlook, especially in the US where the pullback in equity markets was multiple driven and not based on declining corporate earnings (See Exhibit 4). We continue to expect economic activity to remain robust and companies to see strong earnings growth in 2022 led by top-line (i.e. revenue) improvement.
At the same time, we are closely watching inflation and labor markets, especially supply-chain dislocation trends. We note that if supply-chain dislocations persist past 1Q22 growth trends may start to soften. And while the Fed’s desire to start tapering in 4Q has been well articulated and priced into markets, there remains the chance of a knee-jerk reaction when it occurs. Similar to other pullbacks experienced this year we encourage investors to remain focused on fundamentals and the long-term, and capitalize on any short-term opportunities.
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A word on risk
All investments carry a certain degree of risk, including possible loss of principal, and there is no assurance that an investment will provide positive performance over any period of time. Equity investments are subject to market risk or the risk that stocks will decline in response to such factors as adverse company news or industry developments or a general economic decline. Debt or fixed income securities are subject to market risk, credit risk, interest rate risk, call risk, tax risk, political and economic risk, and income risk. As interest rates rise, bond prices fall. Non-U.S. investments involve risks such as currency fluctuation, political and economic instability, lack of liquidity and differing legal and accounting standards. These risks are magnified in emerging markets. This report should not be regarded by the recipients as a substitute for the exercise of their own judgment. It is important to review your investment objectives, risk tolerance and liquidity needs before choosing an investment style or manager.