Investment Review for Third Quarter 2021

Risky asset returns.

Many asset classes came under pressure during the third quarter. Commodities were the one exception, achieving a 6.5% return. U.S. stocks and real estate managed to eke out slightly positive returns, while all other risky asset classes were negative. Emerging market stocks achieved the worst return at -8.1%, as Beijing continued to clamp down on certain sectors of the economy.

Major asset class returns.

China crackdown. 

Beijing has been very active on the regulatory front over the past several months. Technology companies in particular have suffered a great deal due to tighter controls on online lending, an e-commerce anti-monopoly probe, algorithm scrutiny, and restrictions limiting youth online gaming to just three hours per week. In addition, Chinese authorities increased their crackdown on cryptocurrencies with a blanket ban on all crypto transactions and mining.

Shipping log jam. 

In recent weeks, we have seen significant backlogs in the ports of Los Angeles and Long Beach, CA. While the numbers fluctuate from day to day, there were 70 container ships in the queue in late September with total capacity of over 432,000 twenty-foot-long containers. To put the enormity of that number in perspective, that’s more than the inbound container volume the Port of Long Beach handled in the entire month of August. It’s roughly what Charleston handles inbound in four months and what Savannah handles in two.

Unfortunately, the bottleneck is unlikely to subside in the near term as worker shortages are prevalent at ports, warehouses, railways, and in the front seats of 18 wheelers. With supply chains already stretched and holiday shopping demand on the rise, economic activity will likely be hindered in the fourth quarter.

Inflation.  

When examining the current price of goods and services, compared to where they were a year ago, inflation is now running over 5%. As inflation has picked up, Federal Reserve officials have continuously described it as transitory, meaning that it is fleeting or will only last a short time. As prices continue to rise month after month, it is getting more and more difficult to raise that argument. With supply chains stretched, and a shortage of workers in many industries, it is likely inflation will remain at elevated levels for months to come.

Monetary policy.   

With inflation on the rise, many wonder how long the Federal Reserve can keep stimulating the economy? In addition to keeping interest rates low, the Federal Reserve has been purchasing $120 billion of securities per month as a form of stimulus to help jump-start the economy and put people back to work as we recover from the COVID pandemic. These purchases, along with other stimulus efforts early in the pandemic, have resulted in Federal Reserve assets growing from $4 trillion to over $8.5 trillion.

Recently, during the September 22 press conference, Chair Powell stated that the Federal Reserve may be ready to start reducing those purchases as soon as November. This process would likely involve gradually reducing purchases over time until they cease all together around the middle of 2022.

Washington D.C. 

Recently, our leaders in Washington once again failed to pass a budget for the upcoming fiscal year. Instead, a continuing resolution was signed into law late in the day on September 30. Unfortunately, this stopgap measure will only last through December 3.

The next challenge for Washington was increasing the debt ceiling. In August 2019, policymakers enacted a bipartisan budget deal that raised spending levels and suspended the debt limit for two years. On August 1, 2021, the debt limit was reinstated at $28.4 trillion, a level covering all borrowing that occurred during the suspension.

After weeks of bickering, on October 7, legislation to increase the debt limit by $480 billion passed the senate. This increase should be just enough to support borrowing needs through early December. As such, our leaders in Washington will now need to pass legislation to prevent both a government shutdown and a government default squarely in the middle of the holiday season.