As we near the close of the third quarter of 2021, we are on the verge of completing the sixth consecutive quarter of positive returns for the S&P 500. This sustained, 18-month growth in the markets comes as we approach the fourth quarter, which traditionally is the best performing quarter of the year for the stock market as a whole, especially over the last 20 years. Not only has the fourth quarter shown the best average returns, but it also has been positive more often than the other three quarters.
While the U.S. equity markets have set new all-time highs in the third quarter, the consensus among analysts is that there remain substantial headwinds as we move ahead. With that in mind, our investment strategy is looking out to the next 12 months and we see a positive trend for the equity markets as a whole. There have been a few blips, such as concerns about inflation and little progress towards a spending bill in Congress, but we believe it is important to focus on this mid-term perspective and not get sidelined by momentary concerns that may dissipate.
As we enter the fourth quarter, let’s look at some specific areas of interest:
- Consumer spending – Retail sales were expected to decline in August and instead, they were positive month-over-month, so this was encouraging for the economy. A significant amount of wealth has been amassed by the American consumer, accelerated in part due to Federal stimulus that was issued to help people deal with the pandemic and its economic implications during the shutdown. Consumer spending is one of the largest drivers of U.S. gross domestic product (GDP) and the overall financial health of the American consumer remains high.
- Unemployment – Ongoing unemployment claims are at their lowest point since the beginning of the pandemic, dropping the unemployment rate to 5.2% in early August. This represents the lowest unemployment rate since pre-pandemic, one reason we don’t have to worry about the Federal Reserve getting into policy easing too quickly. Even though we are showing temporary increases in inflation in the short term, the Fed strives for a balance between full employment and inflation. Until we get back to that full employment number, we don’t have to worry about the Fed significantly increasing interest rates or completely ending bond purchases.
- Emerging Markets – A region of great interest to us is China. Chinese stocks have significantly underperformed over the last six months and especially in the last six to eight weeks due to concerns over Chinese government regulations. The Chinese government is concerned with maintaining more of a Communist structure and limiting individual wealth and the power of individual companies. The impact of increased government regulation by the Chinese government has spread through almost all sectors, from for-profit education to recreation (most notable the casino operators in Macau) and to the large technology companies throughout China.
While it is unclear how stringent President Xi’s administration will be in the longer term, we do know that the end goal is to continue to grow the Chinese economy and become a powerhouse in the global economy. Anything that would be a roadblock or impairment for that economic growth will not be fully implemented.
Ultimately, we believe there is opportunity in China due to the underperformance of Chinese stocks and the value opportunities that we currently see in the Chinese market. We also believe in opportunities that other emerging markets as a whole present.
In summary, our investment strategy is to stay the course. We remain fully invested in the markets and we don’t see any need to make any drastic changes in the near future. We will continue to monitor market conditions carefully, especially as we approach the second half of 2022. That period may lend greater insight to the sentiment and direction of the Fed and its resulting actions, especially regarding bond purchases and if an increase in the Fed funds rate is warranted.
Securities offered through Regulus Financial Group, LLC. Member FINRA/SIPC. Investment advisory services offered through Regal Investment Advisors, LLC, an SEC Registered Investment Advisor. Registration with the SEC does not imply any level of skill or training. Regulus Financial Group, LLC and Regal Investment Advisors are affiliated entities. JK Investment Group is independent of Regulus Financial Group, LLC and Regal Investment Advisors.