While world stock markets on the whole achieved new highs during the quarter they limped into the waning days of quarter-end. For third-quarter 2021 the S&P index gained 0.58% (making this quarter the fifth quarterly gain in a row), the Nasdaq Composite lost 0.22%, the Dow Jones Industrial average lost 1.46%, the MSCI All country World Index lost 0.96% and the Bloomberg Aggregate bond index lost 0.87%. The ten-year US treasury, while volatile during the quarter ended about where it started at 1.49% while the five-year US treasury rose eight basis points to 0.97%.

Inflation denoted by CPI (consumer price index), although ‘transitory’ as loosely defined by the FOMC, rose to a multi-generational high in August of 5.3% year-over-year. PPI (producer price index) rose to 8.3% range last month. These ‘pipeline’ inflationary prices should pressure the CPI rate further for the balance of 2021 and well into 2022.

The major Global central banks have yet to abandon their currency/economy supporting policies despite the global rise of inflation and continued accelerated economic growth. As we have seen historically, the markets are ‘addicted’ to government support and don’t respond well when it is removed. Will this time be different? In the US the FOMC has telegraphed at this past September meeting they may begin tapering bond purchases as early as November of 2021 with expectations they will conclude their $120 Billion dollar monthly program by mid-2022. As of now the FOMC doesn’t anticipate the need to raise interest rates until the fourth quarter of 2022.

Runaway Congressional spending looks like it has finally hit a stumbling block. Congressional Democrats are fighting amongst themselves to pass legislation to spend $1.5 to $3 Trillion dollars on ‘infrastructure’ projects both traditional and non-traditional. Moderates want to keep to the lower end of the scale while liberals find that $3 trillion is still not enough but they may have to settle for a smaller amount. Compromise via negotiation is still anathema to those Congress people voted into office in recent years. Bipartisan support is non-existent.

As we noted in prior letters, we anticipate that market volatility should ramp-up further this Fall most likely hitting its nadir during October 2021, in concert with the US Government’s debt ceiling folly. A possible correction in the global equity markets continues to be a concern for the fourth quarter of 2021 with the overwhelming majority of equity markets at elevated valuations. As the Covid-19 epidemic and its aftermath takes its toll on humanity, dislocation in global markets continues, especially given the level of unvaccinated populations globally. Our continuing search for undervalued assets requires patience. Until next quarter, stay safe and healthy.