October 1, 2021
The equity markets were mixed in the third quarter of 2021, as the S&P 500 was up +0.58%, US small caps -2.84%, US mid-caps -1.76%, international developed -0.24% and emerging markets -7.39%1.
Expected volatility in the equity markets, or the size of equity market fluctuations, picked up over the past quarter, with the CBOE’s Volatility Index rising from a subdued level of 15.83 to a more normal level of 23.141.
In our view, there have been three key drivers for this increased volatility: 1) heavy-handed regulatory actions taken by Chinese regulators against numerous Chinese companies for anti-trust and other alleged abuses2; 2) financial difficulties at Evergrande, a Chinese property developer that owes approximately $300bn of debt and has already missed scheduled coupon payments on some of its debt2; and 3) coal and gas shortages causing power outages and higher gas prices in China, with similar dynamics occurring in other parts of the world2.
We continue to generally have less exposure to Chinese equities on the equity side of portfolios, compared to the All Country World Index, a global equity benchmark3.
Over the past quarter, the 10-year Treasury yield rose from 1.47% to 1.49%1.
We believe the aforementioned commodity (and labor) shortages have caused the Federal Reserve (Fed) to increasingly see elevated inflation as persistent, and could result in the Fed beginning to taper its bond purchases before the end of the year. Fewer Treasury bond purchases by the Fed could mean less support for Treasury bond prices, which we expect will push up Treasury bond yields.
On the fixed income side of portfolios, we still prefer exposures with relatively short-term maturities; for example, the fixed income portion of our Balanced ETF Strategy has an average maturity length of 3.46 years4.
On the equity side, we tend to have more exposure to the banking industry, which should also support the performance of our portfolios as interest rates rise and banks are able to charge more for mortgages and auto loans.
External sources: Bloomberg data1, CNBC.com2, iShares.com3, Morningstar4.
For more information about our investment philosophy, see MTC Wealth Management.
Non-deposit investment products available through Members Trust Company are not deposits of or guaranteed by the trust company, a credit union or credit union affiliate, are not insured or guaranteed by the NCUA, FDIC or any other governmental agency and are subject to investment risks including possible loss of the principal amount invested. Members Trust Company, owned and managed by America’s credit unions, is a special purpose federal thrift regulated by the Office of the Comptroller of the Currency. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Past performance is not indicative of future results.