Opinion: Economic Market Outlook 4th Quarter 2021

It’s the last stretch of 2021 and investors are finally seeing some more volatility in the marketplace. The S&P 500 tumbled 4.8% in September, notching its worst month since March 2020.

Furthermore, October is typically a spooky month for stocks. After the October stock market crashes in 1929 and 1987 and the October 2008 meltdown during the financial crisis, Wall Street gets the jitters this time of year.

So, what is increasing this volatility? Investors are questioning future economic growth, the Delta variant, Fed policy, Chinese regulation among other things. The economy is transitioning from a liquidity-supported recovery to a self-reinforcing expansion cycle.

Companies will begin reporting earnings for the third quarter in mid-October, and market participants will have an opportunity to look under the hood for specific companies, learn about the outlook into 2022 and get a broader sense of what’s happening in the economy.

Retail challenge

One challenge retailers are facing is the holiday shopping spree. The are balancing on one hand the need to make sure they have items in stock when people do start shopping.

Making sure they have plenty of items on the shelf and secondly, time to get them because it could take a little bit longer, particularly for e-commerce, for things to arrive at your home.

As we saw in 2020 and early 2021, to counter past economic effects of the COVID-19 pandemic lawmakers approved $5.2 trillion in fiscal stimulus. At the end of August, the national debt stood at $28.4 trillion.

Now we are again revisiting the idea of going further in debt and rising inflation as the Biden Administration wants to distribute out $3.5 trillion.

The reason I bring this back up is because the cost of items are rising and that means less gifts under the Christmas tree this year as well as less items on the table when you host your family dinner. It is amazing the cost of items today and that many feel were going to be temporary.

I totally disagree. I think we are going to be involved within an inflationary period for quite some time and you will see an adjustment within the markets representing it as well.

The biggest thing you want to also understand is that equity market returns in the past five years have outpaced even the most optimistic forecasts. Historically, the best predictor of long term returns that we have relied upon have been based on historical valuations and forecasts.

Equities usually deliver 5% to 7% market returns. Not 15% to 30% that you have been seeing. So be blessed if you were invested in the marketplace that you received overperformance that was forecasted within your financial plan and investment allocation.

This is a great time to review your investments and make sure they are aligned with your personal short-, mid-, and long-term goals. Below you will see asset class return outlook over a 10-year period.

It’s not easy to predict the future, so having a broadly diversified portfolio and combining holdings from a variety of asset classes can reduce overall portfolio volatility and improve risk-adjusted performance.

During times of heightened risks and market volatility, being tactical and rebalancing your portfolio can help your portfolio withstand the ups and downs within the market and provide you with a more stable return over time.

Asset allocation

Many analysts remain favorable on the outlook for a diversified portfolio through year-end to 2022, though anticipate more subdued returns compared to those experienced so far in 2021.

Based on rising revenue and earnings, moderate inflation and relatively low interest rates are expressing a “glass half-full” view of the U.S. equities.

So far, year to date, domestic small-cap value is up 25% vs. mid-cap value at 20%, and large-cap value at 17.6%. While domestic growth stocks have been dominating the past few years, domestic value and blend stocks have been delivering solid returns thus far with double digit returns.

Again, many analysts do not see these type of returns continuing over the next five to 10 years.

High-yield fixed income has been the only fixed income category that has been modestly positive thus far in 2021 and that is mainly due to its higher yield of 4% to 7%. But again, remember the higher the return, the higher the risks.

Tactical plays

Analysts continue to favor equities over fixed income as well as domestic vs. international stocks, especially high quality U.S. stocks that remain an alternative for income-oriented investors.

The relative attractiveness of dividend-paying equities over select fixed income alternatives remains favorable, helping support equity prices. At present, 42% of S&P 500 companies offer dividends yielding above the 10-year Treasury yield of 1.5%.

Below you will see a glimpse of the Carlson Dividend Growth Model. During the past 10 years it has delivered solid returns along with a attractive dividend yield with minimal rebalancing. The model is built around 45 positions with an average weighted of 2.22%.

The focus was to deliver a higher income than the S&P 500 along with a modest return with lower volatility.

Seek fiduciary help

Lastly, if you are looking for professional investment management to help you manage your portfolio, look to those who operate and adhere to the higher fiduciary standard of care. Most banks and wealth management institutions operate under state or federally issued trust powers requiring them to act in a fiduciary capacity.

When a person accepts a fiduciary duty on behalf of another party, it creates an ethical relationship of trust with specific duties.

Two such duties are to act in good faith and trust. The term fiduciary comes from “fiducia,” the Latin word for “trust”.

Duties owed to another party are not always financial in nature — lawyers, for example, have fiduciary duties toward their clients — but in the context of investment, fiduciaries are expected to manage their clients’ assets for the investor’s benefit, not their own.

Author’s note: Past performance is no guarantee of future results.

Views expressed are the opinions of the author and not personal financial advice. Read our full disclaimer.