Market Analysis - Third Quarter 2021
3rd Quarter Market Analysis
Real GDP expanded at a 2% annual rate in 3Q21, lower than the 2.6% consensus estimate and a sharp slowdown from robust gains earlier in the year. Weakness was led by a marked deceleration in consumer spending, growing just 1.6%, along with slower home building and a wider trade deficit. Weaker auto sales alone detracted significantly from GDP, and the rotation to services continued at a slower pace. While supply chain issues may persist well into 2022, recent data confirms economic momentum is beginning to pick up.
The October jobs report was stronger than expected, with non-farm payrolls increasing by 531,000 and solid upward revisions to the prior two months. Inflation has well surpassed the FOMC’s 2% target, with the headline PCE price index rising +0.3% m/m and +4.4% y/y in September. Further increases in shelter costs and an acceleration of inflation across a broad range of sectors point to the continued impact of supply chain shortages and a pickup in stickier components of inflation.
At its November meeting, the FOMC officially announced its plans to taper its net asset purchases by $15 billion per month beginning in mid-November. The statement language was somewhat optimistic, acknowledging the slowdown in economic activity, but also that the delta wave is receding. Notably, the Fed appears to be putting a bigger emphasis on reaching maximum employment as a necessary condition for rate hikes. As such, it’s important to note that tapering is not tightening, and while purchases will slow in the months ahead, the balance sheet will continue to expand until settling at about $9 trillion by mid-2022.
Overall, we look for the equity market to help hedge against rising inflation. It’s a good time to review your asset mix and make sure you are confident with the risks you are taking, whether on the equity side or the fixed income side of your portfolio.