2021 4th Quarter Investment Bulletin
Executive Summary
U.S. Stocks decline 5% in September, but post modest gain for Q3-2021.
Bonds remain negative year-to-date with ongoing headwinds.
Valuations remain a concern for the equity market.
Opportunistic portfolio rebalancing will be driven by market entry points if/when fluctuations occur.
Looking forward: looming tax and estate law changes will drive our financial planning conversations in 2022.
Stocks Decline in September
U.S. stocks suffered a decline of almost 5% during the month of September. The pressure on stocks increased as investors became more concerned about waning support by the Federal Reserve, higher interest rates and high stock valuations. The S&P 500 managed a slight gain for the 3rd quarter despite the losses in September, but all other subsets of the market declined during the quarter. U.S. Small Cap stocks and International Emerging Markets had the biggest quarterly losses of 4.41% and 8.67%, respectively.
Bond Market Faces Renewed Pressure
The bond market was mostly subdued for the 3rd quarter but increasing interest rates in September put some pressure on bond prices. The performance for most parts of the bond market was flat to slightly negative during the 3rd quarter, and overall losses have been less than 2% during 2021 for most of the bond market.
Portfolio Positioning
The stock market has continued to achieve meaningful growth since the pandemic losses in March of 2020. These recent gains have been achieved on the heels of more than a decade of significant market growth. The result of this growth is valuations that are meaningfully higher than historical averages. High market valuations can persist but, in the past, have been a harbinger for lower future returns generally caused by larger market declines. Because of that, we don't believe making changes to the portfolio to become more aggressive are justified at this time. However, as we have seen, the stock market can continue to rise despite the elevated risks. Therefore, becoming too conservative has its own risks and challenges. We believe the allocation in your portfolio has a prudent balance between return and risk.
Game Plan for Changes in the Future
As in the past, we will add to stocks gradually during market declines. The table below is our current guidepost for when and approximately how much we would seek to increase stocks should the market continue to falter in October and beyond.
Infrastructure Investment & Jobs Act
The Congress of the United States is engaged in a contentious debate about infrastructure, mainly how much and what type. In a bipartisan effort, the Senate has passed a $1 trillion infrastructure bill focused on providing money for roadways and bridges, rail transportation, broadband upgrades, electric vehicles, and improving power and water systems. The bill has not been taken up by the House of Representatives because Democrats are attempting to pass both the agreed upon Senate plan in addition to a larger infrastructure bill that is likely to be enacted on a strictly party line basis. The larger bill hoped for by progressives would broaden support for families, expand federal health care programs, spend more money combatting climate change, and invest more in infrastructure and jobs. The plan has a price tag in excess of $3 trillion and would largely be funded with increases in taxes on corporations and Americans with incomes in excess of $400,000.
Tax Hikes and Estate Planning
There is a lot of speculation about what will change to pay for the infrastructure bills we just discussed, but as of right now there isn't anything agreed upon. This makes it challenging for advisors and clients to adequately plan when the impact of changing tax laws is unknown. When the bills are finalized, you can be confident that we will study the changes to assess how each client’s financial situation may be affected.