3rd QUARTER 2021 MARKET REVIEW
Thrivent Asset Management Contributors to this report: Steve Lowe, CFA, Chief Investment Strategist; John Groton, Jr., CFA, Director of Administration and Materials & Energy Research; Matthew Finn, CFA, Head of Equity Mutual Funds; and Jeff Branstad, CFA, Model Portfolio Manager
Thrivent Asset Management Contributors to this report: Steve Lowe, CFA, Chief Investment Strategist; John Groton, Jr., CFA, Director of Administration and Materials & Energy Research; Matthew Finn, CFA, Head of Equity Mutual Funds; and Jeff Branstad, CFA, Model Portfolio Manager
Inflation continues to surge as supply shortages linger across a number of industries. Personal consumption expenditures (PCE price index), which is a key measure of inflation, was up 4.3% over the 12-month period through August 31 – the highest rate in 30 years – according to a report issued October 1 by the Bureau of Economic Analysis.
Excluding food (which increased 2.8% over the past 12 months) and energy (which surged 24.9% over the past 12 months), the PCE price index was up 3.6%. While Federal Reserve (Fed) leaders had predicted earlier in the summer that inflation would begin to drop back to normal levels, supply shortages have continued to drive up prices for products and services.
Although manufacturers have struggled with long delays on delivery of raw materials, U.S. manufacturing activity continues to thrive, according to the Manufacturing Purchase Managers Index report issued October 1 by the Institute for Supply Management (ISM). “The latest reading signaled one of the strongest rates of expansion since 1983, boosted by solid increases in production and new orders, as well as a slight rebound in employment levels,” according to the report.
In the stock market, after climbing about 20% through the first eight months of 2021, the S&P 500® index pulled back in September, dropping 4.76% for the month.
The S&P 500 Index was down 4.76% for the month of September, from 4,522.68 at the August close to 4307.54 at the end of September. The total return of the S&P 500 (including dividends) was down 4.65% for the month, but up 0.58% for the 3rd quarter and up 15.92% through first nine months of 2021. (The S&P 500 is a market-cap-weighted index that represents the average performance of a group of 500 large capitalization stocks.)
The NASDAQ Index dropped 5.31% for the month, from 15,259.24 at the end of August to 14,448.58 at the September close. For the 3rd quarter, the NASDAQ was down 0.38%, but it was up 12.11% through the first three quarters of 2021. (The NASDAQ – National Association of Securities Dealers Automated Quotations – is an electronic stock exchange with more than 3,300 company listings.)
Retail sales inched up 0.7% from the previous month in August, and 15.1% from August 2020, according to the Department of Commerce retail report issued September 16. Total sales for the three-month period of May through July were up 16.3% from the same period a year ago.
Auto sales were down 3.6% for the month of August but up 10.7% from a year earlier. Building material sales were up 0.9% for the month and up 6.3% from a year earlier. Department store sales were up 2.4% for the month and 28.6% from a year earlier, with consumers returning to brick-and-mortar retailers as the pandemic receded. However, consumers continued to shop online, with sales for non-store retailers (primarily online) moving up 5.3% for the month and 7.5% from a year earlier. Sales at restaurants and bars were flat in August, with no change from the previous month. But sales were up 31.9% from a year earlier when many businesses were closed to walk-in traffic due to the pandemic.
In the week ending September 25, initial unemployment claims edged up to 362,000 after dropping to just 310,000 claims for the week ending September 4. That had been the lowest level for initial claims since the beginning of the pandemic, March 14, 2020, according to the Department of Labor (DOL). The rise in unemployment claims – even as businesses throughout the country were desperately seeking workers – was attributed, in part, to the impact from Hurricane Ida, which may have caused people to delay filing for unemployment.
The U.S. economy added 235,000 new jobs in August, and the unemployment rate dropped 0.2%, from 5.4% to 5.2%, according to the Employment Situation Report issued September 3 by the DOL. Average hourly earnings for all employees on private nonfarm payrolls rose by $0.17 to $30.73 in August.
The Energy sector of the S&P 500 was up 9.44% in September to lead all sectors, but all other sectors were caught in the market downdraft, posting losses for the month. The biggest losers for the month were Materials, down 7.21%, Communication Services, down 6.58%, and Real Estate, down 6.22%.
For the 3rd quarter, Financials led the way, up 2.74%, followed by Utilities, up 1.78%, and Communication Services, up 1.60%. Through the first nine months of 2021, Energy led all sectors, up 43.22%, followed by Financials, up 29.14%, and Real Estate, up 24.38%.
The chart below shows the results of the 11 sectors for the past month, past quarter and year-to-date:
Bond yields moved up in September on inflation fears, with the yield on 10-year U.S. Treasuries climbing from 1.30% at the end of August to 1.53% at the September close. For the 3rd quarter, the yield on 10-year U.S. Treasuries moved up 0.08% after closing the 2nd quarter at 1.45%.
Corporate earnings expectations continued to rise in the 3rd quarter, as the economy recovered. The 12-month advanced earnings per aggregate share projections for the S&P 500 moved up 6.24% in the 3rd quarter. Through the first nine months of 2021, advanced earnings projections jumped 28.11%.
As earnings projections rose, the forward price-earnings ratio (P/E) of the S&P 500 declined slightly in the 3rd quarter, despite a slight increase in stock prices.
The forward P/E at the end of the 3rd quarter was 20.20 after closing the 2nd quarter at 21.34. It was also below the 2020 closing level of 22.46, although it was still well above the 2019 closing level of 18.18 and the 2018 closing level of just 14.40. If the outlook for corporate earnings continues to improve, that could help hold the line on the P/E level.
The forward 12-month earnings yield for the S&P 500, which is the inverse of the P/E, ended the 2nd quarter at 4.98%, which is slightly better than the 4.70% yield at the end of the 2nd quarter. The 12-month forward earnings yield can be helpful in comparing equity earnings yields with current bond yields. Although the yield is about 2% lower than it was two years ago, it is still significantly higher than the 1.53% market rate of 10-year U.S. Treasuries.
The Euro was down 2.27% versus the dollar in the 3rd quarter, and down 5.28% versus the dollar through the first three quarters of 2021.
The dollar appreciated 0.53% versus the Yen in the 3rd quarter. For the year, the dollar has gained 8.07% versus the Yen.
The strength of the dollar this year has been attributed, in part, to the relatively rapid recovery that the U.S. has made from the pandemic compared with most other countries, as well as its solid economic recovery.
With global travel picking up, oil prices remained at a relatively high level in the 3rd quarter. The price of West Texas Intermediate, a grade of crude oil used as a benchmark in oil pricing, moved up 2.12% in the 3rd quarter, from $73.47 at the close of the 2nd quarter to $75.03 at the end of the 3rd quarter. Through the first nine months of 2021, the price of oil jumped 54.64%.
Prices at the pump have also moved up significantly this year, with the average price per gallon of gasoline rising from $2.31 at the end of 2020 to $3.28 at the close of the 3rd quarter – a 41.93% increase.
With the pandemic abating and the economy rebounding, gold prices dipped slightly in the 3rd quarter from $1,771.60 at the end of 2nd quarter to $1757.00, a 0.82% decline. For the year, gold prices have dropped 7.29% from their 2020 closing price of $1,895.10.
International equities dropped slightly in the 3rd quarter, after a solid run-up through the first half of the year. The MSCI EAFE Index dipped 1.03% from 2,304.92 at the end of the 2nd quarter to 2,281.29 at the close of the 3rd quarter. Through the first nine months of 2021, the index was up 6.23%. (The MSCI EAFE tracks developed-economy stocks in Europe, Asia and Australia.)
What’s ahead for the economy and the markets? See: 4th Quarter Market Outlook, by Steve Lowe, Chief Investment Strategist, Thrivent Asset Management
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Media contact: Samantha Mehrotra, 612-844-4197; samantha.mehrotra@thrivent.com
All information and representations herein are as of 10/05/2021, unless otherwise noted.
The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Thrivent Asset Management, LLC associates. Actual investment decisions made by Thrivent Asset Management, LLC will not necessarily reflect the views expressed. This information should not be considered investment advice or a recommendation of any particular security, strategy or product. Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon, and risk tolerance.
Any indexes shown are unmanaged and do not reflect the typical costs of investing. Investors cannot invest directly in an index.
Past performance is not necessarily indicative of future results.
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