While investors were treated to new all-time highs in the S&P 500 once again in the third quarter, tricks were still present, enough to wipe out most of the gains in the market by quarter end. Here are some of the things that we saw spook the market:

1) Corporate Earnings Concern

Corporate commentary started to turn more cautious in September. Companies from multiple industries cited profit warnings related to supply chain constraints, margin compression, and increasing inflation, causing investors to become more concerned about the outlook for corporate earnings.

2) Political Influence

Politics once again became an influence on markets, as Democrats unveiled new details on a $3.5 trillion spending package and tax plan that included increases to the corporate tax, personal income taxes for high earners, and changes to capital gains and inheritance taxes. Meanwhile, both parties struggled to avoid default by raising the debt limit.

3) Taper Talk

The Federal Reserve confirmed market expectations that it will likely begin to reduce Quantitative Easing and its crisis-era support of $120 billion in monthly asset purchases before year-end. Many investors believe that the market could have been held up in the last year or so by the Fed injecting money into the economy.

This combination of factors, in addition to other exogenous events, hit stocks hard in late September. The S&P 500 suffered its first 5% pullback in nearly a year, wiping out quarterly gains in most asset classes, and causing the S&P 500 to be roughly flat for the quarter.

Our Outlook: Neutral

So far in the fourth quarter, markets have continued their resiliency despite the fears noted above. The S&P 500 has continuously made new highs, while earnings have exceeded expectations. Given our forecast for growth to accelerate in the 4th quarter, we view the recent volatility in September and the beginning of October to be episodic and remain constructive on risk assets. But this optimism could very well be short-lived, as we project that the economy will resume its slowdown in the first half of 2022. Investors should keep in mind that the volatility we experienced at the end of the third quarter is common when economic growth slows. Should the Fed tighten monetary policy into a slowing economy, we could experience the same volatility we saw in the final few weeks of September.

How we Can Help

At GGM, aligning your investments with the prevailing economic environment is just one of the ways we strive to add value to your portfolio. If you are concerned about whether your investments are prepared for what’s ahead, we recommend our complimentary portfolio checkup. Contact us today!