The third quarter ended with heightened market volatility. The major stock market indexes ended the quarter mixed, with some showing slight gains, while others posted small losses. Worries over inflation, decelerating economic growth, the rise of the Delta COVID variant, and political turmoil in Washington weighed on investors.
Consumer Finances and Jobs Are Still Strong
The household savings rate has declined this year but remains well above pre-pandemic levels. Consumer spending again reached record levels in the third quarter, as economic reopening proceeded. Unemployment continued to improve, with over one million jobs being created and filled. Although it will be a few weeks before final economic numbers are available, the economy appeared to continue to grow at a reasonable rate in the third quarter. Early estimates indicate the economy grew between 1% and 3% in the third quarter. This is a decline from the extremely strong 6%+ growth we experienced earlier in the year.
Although the rate of economic growth is slowing, this isn’t necessarily a bad thing. Many sectors of the economy have struggled with supply problems and labor shortages. An economic slowdown will give companies time to resolve some of these problems and help alleviate inflationary pressures. The decline in demand for goods as prices rise is a sign the economy is functioning normally. One example of this is in the housing market. Home price increases reached all-time highs in April but a housing market cool-off followed in May and June.
Proposed changes in tax and fiscal policy have weighed on the markets in recent weeks. Substantial increases in income taxes and capital gains taxes could likely slow the economy and trigger a recession. However, it is of interest to remember that mid-term elections are around the corner. Neither party wants to take the blame for causing a recession, which makes compromise on fundamental issues of tax policy, fiscal policy, and the debt ceiling more likely than not. Higher tax rates will make tax planning even more valuable.
No matter what policies ultimately come from Washington, history tells us that the markets tend to rise nearly every three out of four years. Markets average one substantial drop annually, and daily dips of about 2% occur about five times a year. Even with the recent volatility, the market has hardly experienced an average number of daily slumps this year.
As with all things in the markets, there is a natural ebb and flow to economic growth. Signs of a potential economic slowdown are not a good reason to sell stocks. History shows that often the best returns for investors come when least expected. In the long run, the United States remains the global epicenter; for economic growth, technological innovation, and purposeful capitalism. Long-term investors will do well to continue to bet on America.
Matthew A Treskovich | CFA, CPA/PFS, CITP, CMA, CFP®, AEP®, MBA, CLU, ChFC
Chief Investment Officer