The summer started off with smooth sailing for markets, but ultimately stubbed its toe on concerns over future growth and inflation for a flat performance overall. Looking in the rear-view mirror, this emerging period of uncertainty was as predictable as the strong first-half was. Early in 2021, the Covid reopening trade was still hot. Backed by on-going monetary support, small-cap and value stocks led one of the strongest first halves in nearly 20 years. However, by spring small-caps had peaked and the trade began to languish. Since that time, concerns arose over inflation and slowing growth ahead even as the US Federal Reserve began to hint at reeling in its easy money policies. That drumbeat has persisted and become increasingly loud, causing violent rotations among sectors along the way. A policy crackdown and large real estate developer debt default in China, in addition to a mid-summer rise in Covid-D and a US debt ceiling showdown only added to the more sanguine mood.

More recently, we have seen consistently high inflation prints exacerbated by global supply chain disruptions and rising energy costs. Core inflation rose +4.0% in August from the prior year, the highest level in nearly 30 years (US Bureau of Labor Statistics, News Release, 9/14/21). That and the natural transition from a rapid recovery phase to a steadier economic state plus vaccination lags overseas recently prompted the International Monetary Fund to downgrade its global GDP forecast for 2021 a fraction to a still healthy +5.9%, stepping down to +4.9% for 2022 (Wall Street Journal, “IMF Cuts Global Growth Forecast…,” 10/12/21). While inflation is expected to moderate, it has been sufficiently high that the US Federal Reserve accelerated its ‘tapering’ schedule to reduce bond purchases this fall. The natural concern with markets ‘priced to perfection’ as stimulus is withdrawn, is that a “misalignment” between prices and the economy could ignite a greater correction.

For the quarter, US large-cap stocks finished effectively flat (‘SPY’ ETF Proxy*), still up +15.9% for the year. Overseas equities under-performed again, held back by a strengthened US Dollar and the China factors mentioned above. Bonds also finished flat and are subject to rising rate volatility ahead. More dramatically, commodities managed another +4.8% rise (‘DBC’), leaving them up +37.3% for 2021.

Despite the apparent consolidation phase that markets have entered, we have yet to see the typical -6.5% retrace that tends to occur on an annual basis. Time will tell if fall shall bring that investors way, but for now with the economy fundamentally sound, we expect the current action to serve as a likely set-up for a traditional year-end rally assuming politics doesn’t get in the way again with the US debt ceiling. Meanwhile, we will be closely monitoring client portfolios and wish you a wonderful fall and holiday season ahead.

* Not Individual Investment Advice; Dividend-adjusted proxy ETP data from Commodity Systems, Inc. & Allocations as of September 30, 2021 may not apply to all clients; ECA assumes no duty to update any information in this presentation for subsequent changes of any kind.