DWM's 3Q21 Horrific Market Commentary

October 06, 2021

Happy October, the month home to that special holiday dedicated to spooky spirits and events: Halloween. It’s also that time of year when we get the annual ritual of horror movies. I loved growing up watching these flicks and their characters like Freddy Krueger and Jason! Or hearing the shrieking sounds amongst chainsaws. Well, if you’ve been paying attention to the market the last few weeks, it’s a little like a horror movie filled with all the gore, pain, and ridiculousness one would expect when sitting down to something like Hellraiser or Scream.

Let’s review some of the recent episodes within the markets causing fear:

  • Frightening is that, see left graph above, there is almost 11 Million job openings yet…


  • Horrifying is the fact that 50% of small businesses report they can’t find people to hire (right top graph), pushing to heightened levels of wage growth.


  • Terrifying is the global supply chain issue. We have surging consumer demand, yet hard for companies to get anything to market when you don’t have the laborers or raw supplies, which leads to…


  • Blood-curdling is inflation. After decades of inflation relatively under control, it’s currently spiking. The Fed wants us to believe that it will be only “transitory”; but because of higher wages, higher expectations, and higher rents, we find that hard to believe for this current economic expansion. The spirits have been let out of the cemetery and will be hard to bring back into the grave. Boo!

Not all of it is scary – I loved the horror flicks that threw in absurd comedy, like the Creepshow series or Maximum Overdrive. Speaking of which:

  • Ridiculousness is our US Debt Ceiling situation. Washington will most likely work this out, but the drama leading up to every witching hour is worse than the last Friday the 13th.

Many horror movies have good endings. So we would be remiss to not point out some of the non-threatening, reassuring happenings out there, but first let’s see how blood-wrenching this quarter was for the various asset classes.

Equities: The stock market rally was rolling along to start 3Q until it got hit with a machete, evidenced by the S&P500 getting chopped 4.7% in September alone. Still, the S&P500 managed to eke out a 0.6% gain in 3Q and is now up 15.9% for the year. The MSCI AC World Index finished the quarter down 1.1%, yet still nicely up 11.5% for 2021. The MSCI AC World Index ex-USA (a good international proxy) suffered 3.0% and now up only 5.9% for the year. The P/E on the S&P500 is high versus historical standards – one standard deviation above average – although with expected strong 4Q earnings and prices staying relatively in-line, this metric could start looking much better.

Further, the S&P500 is heavy with megacap growth companies – when we look elsewhere in equity land, a case can be made for great opportunities in both value and international.

Fixed Income:  It’s been a kind of gruesome to be a fixed income investor as of late and that really didn’t change in 3Q21 as bonds, as represented by the Barclays US Aggregate Bond Index, were relatively flat. Little worse for global bonds with the Barclays Global Aggregate Bond Index down 0.9%. Another eerie note worth mentioning is that they’re still in negative territory for the year, -1.6% and -4.1% respectively. It’s like Paranormal Activity! Easy monetary policy along with last year’s recession has left yields at very low levels. In fact, the US 10-yr Treasury finished the quarter right around 1.3%. At some point, raising consumer prices, home prices, and wages should lead to yields heading up which puts inverse pressure on bond prices.  

Alternatives:  It was a pretty dead quarter for most alternatives with the Wilshire Liquid Alternatives Index (“WLAI”) down 0.4%. Given the inflation scare, commodities have been a great place to be, up 4.4%* for the quarter and now up 16.2% for the year. Other alt areas like real estate and hedge funds gave back a little on earlier YTD gains.

To sum it up, it wasn’t as bad as facing Chucky in Child’s Play (or in a Raider game for that matter), but it was a challenging quarter for most asset classes. But, as we have said before, there is nothing wrong with a healthy pullback. Take a look at the ASSET CLASS RETRUN QUILT MAP, particularly since 2019 showing how strong returns have been almost fully across the board. And because of it, household net worth has soared to record highs! Further, lots of pandemic relief stimulus was used to pay down debt, hence debt service is at the lowest it’s been in decades. Lots of people out there are feeling flush with cash and ready to spend, which will lead to more economic growth.

Lastly, we haven’t talked much about Covid – nothing to joke about there – but the latest readings suggest that the Delta variant is indeed fading away with many authorities feeling like that was the last real wave of Covid. And even if not, many parts of the economy have adjusted to being able to operate in a pandemic environment and as such, Covid will continue to have less and less of an impact on how we operate as a whole and its influence on the markets.  

In conclusion, it is indeed Halloween time with a lot of spookiness abound! But it doesn’t have to be the American Psycho story forever. After a weaker 3Q21 due to the Delta variant and lack of inventory and services, the fourth quarter and beginning of 2022 are predicted to be quite strong! Profit margins are at all-time highs. As Les wrote in a recent blog, American businesses are doing very well. Despite some issues in China, the rest of the world is in or close to recover mode as vaccinations go up everywhere. Hopefully it’s not a horror movie when the Fed starts tapering most likely later this year and starts raising the Fed Funds rate possibly later 2022. In any case, make sure to have a good wealth manager leading you through the dark cornfields. You don’t want to wind up as the next Nightmare on Wall Street.

Happy Halloween!

Brett M. Detterbeck, CFA, CFP®


*represented by the Eaton Vance Parametric Structured Commodity Fund



Detterbeck Wealth Management is a fee-only financial planning / wealth management company with offices located in Palatine, IL (Chicago area) and Charleston, SC areas serving clients locally and across the country. To contact us about setting up an appointment, please see our contact us page