Fears over peak growth, concerns about the rising Delta variant, uncertainty around the beginning of tapering, confusion on stimulus from Washington, D.C., and credit market anxiety due to China and Evergrande each dominated price movements in the third quarter. These factors led to the first quarterly rise in volatility, as measured by the VIX, since the Covid pandemic began in first quarter of 2020. The economic data, although mixed, continued to signal that domestic growth remained strong. Job openings hovered at 20-year highs, core inflation increased at a faster pace than any year since 1991, and finally, companies reported very strong earnings.
Assets still responded positively to this environment with equities, as measured by the S&P 500 Total Return Index (SPXT), up 0.58% for the 6th quarterly gain in a row. Commodities, as measured by the Bloomberg Commodity Index (BCOM), are up the greatest amount since 2009-2010. S&P 500 Total Return Index (SPXT) is now up 15.92% year to date, while the BCOM is up 29.09% for its best year on record dating back to 1988. In contrast, fixed income has not been part of the asset inflation party. The US Barclays Aggregate Bond Index was up 0.05% in the third quarter but was down 1.55% for the year. This is particularly noteworthy because fixed income has been down only three other years since 1977. With inflation stubbornly remaining at high levels, pressure on investor’s fixed income portfolio is becoming a central theme.
Portfolio managers continue to hear from companies that labor shortages remain a major headwind for their businesses. At the same time, bottlenecks still exist as measured by global economic data and port measurements. With winter approaching, coal, natural gas and oil prices have moved higher on the back of shortages from around the globe. Consequently, it has been increasingly more difficult to see when the transitory inflation will pass. Economic uncertainty has been a leading indicator of market volatility, as seen in September when both the S&P 500 Index and the ICE U.S. Treasury 20+ Year Bond Index were down more than 3.0%. Given these renewed fears of higher inflation, we continue to hear from investors that they are looking for investment solutions. The recent events emphasize the challenges faced with trying to maintain a traditional 60/40 portfolio. The Weiss view has long been that allocators could potentially benefit from broadening their search to include liquid alternatives that may offer better diversification.