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The Cornerstone Investment Commentary: 3rd Quarter 2021

The rising threat of COVID’s Delta variant combined with the Federal Reserve’s intended 2022-23 short-term interest rate hikes left both stocks (equities) and bonds (fixed income) at roughly the same levels seen back on June 30th even as the prospects for some near-term volatility seemed to increase.

By contrast, the rise in both COVID cases and people’s hesitations to resume ‘fully normal’ lives should dampen the risks of economic overheating and longer-term inflation.  This sets up a situation we’ve seen countless times before:  the temptation to time shorter-term events while losing sight of the longer-term big picture.  No doubt some will try to do this, but we will not.  As vaccines continue the – clearly uneven – re-opening of the global economy, we believe this will remain positive news for global equities which will not be offset by interest rates or inflation.  Acting on this belief has paid off well so far in 2021.

Looking at the past quarter, we note that shorter-term bonds fared best, and U.S. equities outperformed foreign.  In the U.S., large growth stocks outperformed large value stocks while the opposite occurred for small cap stocks.  (Small value stocks remain the U.S. stock market’s top-gaining category for 2021.)  Each of these events aided portfolio decisions made earlier this year, and your portfolio’s active managers have added even more value through their results.  That said, the pandemic’s unpredictable nature makes significant portfolio changes in any direction seem speculative and unwise.

Two big measures are worth watching in coming quarters:  1) Will interest rates rise noticeably above their pre-pandemic levels?  So far, they have not.  Doing so would be bad news for global equities (and bonds, except for the short-term variety).  And 2) Will 12-month core inflation be as high next Spring once each 2021 monthly rate is replaced by its 2022 results?  This seems unlikely, which would help commodity prices to fall.  Already, inflation increases this March until June have given way to declines since then; August saw the lowest inflation since February 2021.

As we wrote last quarter, “there will be further uneven-ness to the global recovery” and “at time things will seem too hot and at others too cool”.  Already, these are proving true even as they reinforce a focus on the longer-term picture rather than on shorter-term events.  Though we believe your portfolio remains well-positioned for such conditions, we continue to watch for evidence which suggests the need for further defensiveness beyond what you already hold for that purpose.

We send our hopes and wishes that health and well-being will be with you and your loved ones for the Thanksgiving and Christmas holidays, and we thank you for the continuing opportunity to work with you.