MARKET RETURNS:  The global stock market rally took a pause in Q3 as September’s selloff led to a negative quarterly return for global stocks.  U.S. stocks continued to outperform, posting a modestly positive total return for the quarter.  Foreign developed market stocks recorded a slight decline in Q3, while emerging markets lost over -8% and are now in negative territory year-to-date.  An appreciating U.S. dollar explains part of the regional divergence, combined with the ongoing effects of COVID-19 and concerns related to regulatory action and the real estate market in China.  High quality U.S. bonds produced a slight gain during Q3 despite the recent backup in interest rates.  Foreign bonds were unable to keep pace as they faced a headwind from currency fluctuations.  Cash continued to provide very little return as the Federal Reserve kept its policy rate near zero even as officials discussed potential future adjustments to that stance.

Asset Class Index 3rd Quarter


Year to Date
US Large Cap Equities S&P 500 Index TR 0.58% 15.92%
Int’l Developed Equities MSCI EAFE Index NR USD -0.45% 8.35%
Emerging Market Equities MSCI EM Index NR USD -8.09% -1.25%
Fixed Income Bloomberg U.S. Agg Bond Index 0.05% -1.55%
Cash US Treasury Bill Auction Avg 1-month 0.01% 0.03%
See “Index Descriptions” for more information at the end of this document


Supply Chain Bottlenecks:   Supply chain complications have cast uncertainty over the timing of the global economic rebound and may contribute to higher inflation as the holiday shopping season approaches.  While this situation presents challenges for markets more broadly, it could favor assets such as real estate that have historically benefitted from higher inflation, as well as value stocks through increased demand for commodities and working capital.   The many contributing factors include the tightness and inter-connectedness of global manufacturing, uneven pandemic recoveries, labor market challenges, and even environmental and social considerations.  Manufacturing is constrained by shortages of raw materials and components.  Severe weather and government policies have led to limited supplies of critical inputs, such as natural gas for power generation in Europe or water for semiconductor production in Taiwan.  Following several decades of globalization, finished products often incorporate intermediate goods produced in various locations around the world operating at different capacity levels.  Long-distance transportation has been hindered by pandemic restrictions and worker shortages.  More stringent border crossing requirements have slowed rail shipments to Europe; quarantine orders at ports have led to delays loading and unloading cargo.  A scarcity of dock workers and truck drivers has further complicated the situation, extending out delivery timelines and increasing pricing as shown in the accompanying chart.  When and how this situation will be resolved is unclear, but it’s likely that at least a portion of the associated cost increases will be passed through to meet pent-up demand from end consumers.

China Regulatory Crackdown:  Regulatory reforms in China so far this year suggest a shifting emerging markets investment paradigm that balances governance concerns against state support and incorporates regulation as a more significant risk factor, potentially shifting back towards “old economy” sectors as shown below.  An awareness of the context and motivation surrounding the far-reaching crackdown should help investors navigate the repercussions and potential future actions while managing exposure to this sizable component of the emerging markets.  Recent moves have the potential to generate higher long-run stability and can be seen as a reassertion of party values combined with an extension of efforts to reign in excesses as China’s economy matures.  The economic opening and liberalization agenda pursued since the late 1970s produced the desired increase in growth, but with unintended side effects of inequality and corruption reminiscent of the Gilded Age in America.  Upon taking office in 2013, Xi Jinping prioritized anti-corruption and environmental reforms to address certain of these issues, and now appears to be extending the focus to economic security and stability, “common prosperity”, and fair competition with a dominant role for state owned enterprises[1].  While aspects of this approach deviate meaningfully from free market systems, we see the potential to create a broader and more durable economy over time if executed successfully.

CONCLUSION:  September’s equity market selloff serves as a reminder of the complementary role of other asset classes within portfolios.  Patience is required to own low yielding bonds and less volatile alternatives during a stock rally such as the one that has followed the initial COVID-19 shock early last year.  It’s often only in more challenging environments for stocks when those assets demonstrate their stability and diversification benefits, and we expect the outlook for risk assets going forward won’t be quite as benign as over the past year and a half.  An extended recovery timeline and ongoing policy support provide reasons to be constructive, while the supply chain and geopolitical issues discussed above represent checks on that view.  Fiscal spending and tax policy will also be important influences on markets and planning decisions for certain clients, although shifting political dynamics render detailed analysis and associated actions premature in our opinion.

We wish you a safe and enjoyable holiday season as the end of the year approaches!

Index Descriptions:

S&P 500 Index TR is a market capitalization weighted index which represents the broad market for large company U.S. stocks.  Returns reflect the reinvestment of dividends.

The MSCI EAFE Index NR USD is a market capitalization weighted index which represents the broad market for large and mid-sized developed market stocks excluding those from the U.S. and Canada.  Returns reflect the reinvestment of dividends and foreign withholding taxes and are translated into U.S. Dollars.

The MSCI EM Index NR USD is a market capitalization weighted index which represents the broad market for large and mid-sized developing market stocks.  Returns reflect the reinvestment of dividends and foreign withholding taxes and are translated into U.S. Dollars.

The Bloomberg U.S. Agg Bond Index is a market capitalization weighted index which represents the broad market for taxable investment grade U.S. dollar-denominated bonds. Returns reflect the reinvestment of interest.

The US Treasury Bill Auction Avg 1-month is an index comprised of short-term U.S. government-issued investments with yields collected weekly and can be considered a proxy for cash.

Portfolio performance, characteristics, and volatility may differ from the benchmarks shown. Opes portfolios are managed according to their respective strategies which may differ significantly in terms of security holdings, industry weightings, and asset allocation from those of the benchmarks. Benchmarks are unmanaged and provided to represent the investment environment in existence during the time periods shown. An index is not available for direct investment, and does not reflect advisory fees, any of the costs associated with buying and selling individual securities, or any other fees, expenses, or charges. Past performance may not be indicative of future results.

The opinions expressed in this article are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security. All opinions expressed herein constitute the judgment of the author(s) as of the date of the report and are subject to change without notice. The material has been gathered from sources believed to be reliable, however Opes cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. This information may contain certain statements that may be deemed forward looking. Please note that any such statements are not guarantees of any future performance, and actual results or developments may differ materially from those discussed.  Opes does not provide tax or legal advice, and nothing contained in these materials should be taken as such. As always please remember investing involves risk and possible loss of principal capital. Advisory services are only offered to clients or prospective clients where Opes and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Opes unless a client service agreement is in place.

[1] Zhao, Chen. “In Search of the ‘Xi Doctrine’.” Alpine Macro Special Report. September 6, 2021.