• Wealth Management Division

The Fourth Quarter and Beyond

The economy is transitioning from a recovery phase to a sustained expansion as we enter the fourth quarter of 2021. Investor confidence has moved in tandem as well, moving from optimistic to somewhat pessimistic. That is reasonable since, while the fundamental trends are favorable, the economy and markets might not have room to push higher. Investors are concerned about the speed of growth, worried about stagflation, China's debt problems, Fed policies, the government debt ceiling, and other ongoing issues. In the closing months of the year, how can investors manage short-term risks while keeping a long-term perspective?

Indeed, investing is never simple, unless in theory. Even if investors have a solid financial plan and portfolio strategy, there are always things that concern them at the present. This year alone, issues as diverse as the presidential transition to the delta variant and Afghanistan have kept many investors from sleeping peacefully at night. Nonetheless, by the end of the third quarter, the S&P 500 has gained over 16 percent this year. Markets consistently demonstrate that individuals who can maintain discipline and see beyond the daily headlines are typically greatly rewarded, regardless of market volatility and sentiment.

Still, today’s major concerns weighing on markets might appear virtually overwhelming. We have seen some serious structural deficiencies with global supply chains, much of which is due to ongoing production and shipping delays that have impacted sectors ranging from electronics to building materials. These issues not only impact the performance of firms, stocks, and sectors but also impact monetary and fiscal policy. Meanwhile, Congress and the White House are vigorously seeking additional spending measures that will influence tax policy. To top it up, we have seen a significant shift in markets over the last several weeks, with interest rates beginning to climb after a two-quarters pause. It has put negative pressure on tech-related sectors, offsetting gains in other sectors like energy and finance, which have benefitted from these developments.

Let’s sort through the noise and aim at the major developments that have an opportunity to affect the markets in one way or the other. We are currently maintaining our focus on the following:

  1. The economy is continually expanding at a tremendous pace. GDP in the United States has surpassed pre-pandemic levels, as have business earnings, and several indicators of financial and economic activity have reached multi-decade highs. Despite market concerns, fundamental economic patterns remain solid.

  2. Inflation is elevated by a variety of traditional metrics. The Fed's preferred PCE inflation rate, for example, is at its highest level since the early 1990s. The Fed has also indicated that its inflation objectives have been met.

  3. As a result, the Fed is expected to start reducing its asset purchases in the fourth quarter. The Fed has been hinting at this possibility in recent months and has stated that tapering will be a gradual process that will extend well into 2022. They have also stated that rate hikes will be subject to a stricter, more demanding set of conditions and will most likely not begin until their asset purchases are completed.

So, what do we see here? We expect the markets to remain somewhat volatile and at approximately the same level for the remainder of the year, as the economy remains strong, but upcoming changes in monetary policy would pressure further expansion. As inflation remains elevated and tapering effort approaching, the technology sector will be hit the hardest. Although, we do not expect a significant loss in this sector and see it as a healthy correction and long-term buying opportunity as tech sectors remain lucratively attractive. Beneficiaries of such an economic and financial development would be the financial and energy sectors, which have already improved and should continue to grow throughout the end of 2021 and the first half of 2022.

Accordingly, a real commitment and discipline are required to achieve financial goals in such an unstable market environment. Investors must constantly weigh risk and return, regardless of what markets are concerned about in the near term. Regardless of sentiment fluctuations, remaining invested and diversified are the keys to attaining your objectives in the fourth quarter and beyond.

The material on this page reflects PG Capital's professional opinions as of today and is subject to change. The information presented here has not taken into account any particular investor's investing goals or needs, and investors should not base their investment decisions entirely on this material. Past performance is not a guarantee of future results. All investments involve some amount of risk, and investors have different time horizons, goals, and risk tolerances, so consult with your PG Capital Financial Advisor before proceeding.

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