3rd Quarter Market Commentary
After a first half of 2021 that saw US equity markets climb well into double digits, all the major indices hit a wall in the back half of the third quarter and closed the period flat to down. Although the S&P 500 index eked out a 0.23% gain, the Dow Jones Industrial Average (DJIA) and Nasdaq Composite Index dropped 1.91% and 0.38% respectively. The Russell 2000 small company stock index continued to underperform its large cap peers, sliding 4.60% in the quarter.
Traders’ risk-off stance wasn’t limited to small caps, which peaked in mid-March. Developed international markets as measured by the MSCI EAFE index fell 1.03% while Chinese economic woes dragged the MSCI Emerging Markets index down 8.84% in Q3. Investors’ preference for US large cap growth stocks accelerated through the quarter, with the Nasdaq Composite Index peaking on September 7th, a full three weeks after the DJIA began retreating off its all-time high. By quarter-end, the S&P 500, DJIA, and Nasdaq Composite indices had fallen 5 to 6 percent off their peak levels.
Bond prices were largely flat over the quarter, with the 10-year US Treasury bond yield rising modestly from 1.44% to 1.53%. The bond market has yet to react strongly to elevated inflation data, which haven’t shown signs of abating. Market observers cite slowing global economic growth due to ongoing supply chain disruptions and related labor shortages across key economic sectors as factors supporting bond prices and holding yields down despite the inflation situation.
The stock market’s recent pullback is the first 5% decline of 2021, and the market has not endured a 10% or greater correction since the short-lived COVID bear market in early 2020. This long period of relatively low volatility makes the market vulnerable to continued weakness in the short term, particularly in the month of October, which, along with September is historically the worst seasonal period for stocks. The specter of disappointing corporate earnings represents a potential catalyst for extending the current selloff in equity markets, as the upcoming third quarter earnings season will reveal the extent to which widespread inflation and production problems across the global economy are impacting profits.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.