The just completed third quarter delivered unremarkable returns in stocks and bonds, although volatility was picking up towards the end of September. Choppiness in the financial markets was long overdue as we haven’t experienced a 5% or greater correction in stocks this year, an amazing feat given the ongoing pandemic, inflation concerns, and general dysfunction in Washington D.C. Despite the volatility during the quarter, stocks were holding onto double digit gains on a year-to-date basis, while bond returns were anchored near 0% for the same period.
With Congress currently working through meaningful legislative packages, we anticipate their final bills will have significant implications for the market. While the Senate and House were narrowly able to avoid a government shutdown on September 30th, Democrats and Republicans have become entrenched on other matters. Given the political polarization present at this time, we do not expect further collaboration on either of the massive infrastructure or domestic policy bills being debated. Total government spending is expected to cost $5 trillion or more and be mostly funded by higher individual and corporate taxes.
The Federal Reserve, who is charged with important tasks including the setting of monetary policy for the U.S., has tough decisions ahead as they gauge business conditions in the economy. In recent months, the Fed has observed robust GDP growth of over 6%, supported by improving employment and housing numbers. At a recent Federal Open Market Committee (FOMC) meeting which concluded on September 22nd, Chairman Powell hinted that monetary stimulus would be reined in before the end of the year, and that the process of raising interest rates would commence in 2022. Up to this point, Fed policy has been geared towards supporting the economy during the pandemic. With the re-opening of the U.S. and international economies mostly on track, investors will now be positioning for an environment of less monetary stimulus from central bankers as we transition past the worst moments of the health pandemic.
Looking ahead, the International Monetary Fund (IMF) is projecting global GDP growth of 4.9% next year, down from 6% in 2021, albeit still a healthy rate of expansion. While this favorable growth outlook is promising, businesses still need to contend with macroeconomic headwinds, including new possible variants of the virus, supply chain disruptions, and troubling inflation spurred by spiking oil prices. Lastly, geopolitical risks can’t be overlooked, as China’s recent aggressive actions towards Hong Kong and Taiwan create the potential for escalating tensions with the United States and other neighboring governments.