The post-lockdown recovery stumbled in Q3. Worries about inflation, supply bottlenecks, and particularly monetary policy dampened investors enthusiasm. Another concern was the highly contagious delta variant of COVID-19. Despite the recent inflation spike, which still appears transitory, economies continued to reopen and we have seen double-digit GDP rebounds from the 2020 lows.
Global equities are expensive, particularly so in the US. Despite the outstanding performance of value stocks over the past year, the value spread remains historically high, indicating that US value and non-US equities have a higher expected return going forward.
The US has led the recovery, but the rest of the world is positioned to follow. Emerging markets have lagged due to their slow vaccine rollout and pressure from the slowdown in the Chinese economy, which is a significant concern. China has eased monetary and fiscal policy, but future policy direction is difficult to predict.
The key risk going forward remains inflation and the response of central banks. The Fed will likely start tapering asset purchases later in the year, but the timing of rate hikes depends on what happens relative to its 2% inflation target in 2022.
If much of this sounds uncertain, it is, and making investment decisions based on predictions is rarely successful. As David Booth, the Executive Chairman and Founder of Dimensional Fund Advisors reminds us in this quarter’s article, developing a plan and building a portfolio solution based on that plan creates the best chance of having a good investment experience. As always, we are ready to help with that.
Please take a moment to view our Q3 2021 Market Review.
J. Brent Everett
Chief Investment Officer
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