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Quarterly Summaries

2021 Quarterly Summaries

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Review of Securities Markets, Third Quarter, 2021

After a strong first half of the year, global stocks continued to rise in July and August before falling in the month of September. The main barometer for large company stocks in the United States, the S&P 500,1 ended the quarter with a modest gain of 0.6%, bringing the total return for the first three quarters of the year to 15.9%.

Attractive gains have been recorded in other domestic equity asset classes this year. Value stocks fell 0.8% during the quarter but the Russell 1000 Value Index2 was up 16.1% year to date as of September 30. Small companies, as represented by the Russell 2000 Index,3 fell 4.4% during the quarter but year to date gains were still 12.4%. Despite a 3.0% decline for the Russell 2000 Value Index3 in the third quarter, the value part of the small cap market shows a 22.9% year to date gain.

U.S. real estate stocks continue to perform strongly this year. The MSCI Real Estate Index5 rose 0.7% in the quarter, bringing the year-to-date advance to 22.3%.

Owners of foreign stocks have earned good but more restrained returns thus far this year. In the third quarter the MSCI ACWI Index6 of developed market stocks outside the U.S. declined by 3.0%, resulting in a year-to-date gain of 5.9%. The value and small cap parts of foreign markets overseas have been yet stronger performers this year. The performance laggard in the third quarter was emerging market stocks, which fell 8.1%. The MSCI Emerging Markets Index7 was down 1.3% in the first three quarters of the year. China is a big part of the Emerging Markets Index and the MSCI China Index8 is down 16.7% this year.

Bond returns were close to flat in the third quarter, as the benchmark Bloomberg Aggregate Bond Index9 rose by 0.1%. For the first three quarters of the year, the “Agg” is down 1.6%. Inflation Protected Treasury Bonds continued to be a bright spot in fixed income, as the Bloomberg US TIPS Index10 rose 1.8% in the third quarter. TIPS are up 3.5% year to date.

Perhaps the most remarkable asset class in 2021 has been commodities. The Bloomberg Commodity Index11 rose 6.6% in the quarter, and gains through September 30 stand at 29.1%. To the dismay of “gold bugs,” higher inflation has not resulted in higher prices for shiny rocks, as both gold and silver have fallen in value this year. What has become a lot more expensive is energy. Year to date price gains for natural gas are 112.9%, as people who live in colder climates have already discovered. $5 gas is common in California in part because West Texas Intermediate (WTI) Crude Oil has risen in price by 54.6% this year.

Moving For Better Prices

According to a recent article by Nobel-prize winning Yale economist Robert Shiller, an index of U.S. home prices rose more than 17% in the year that ended in July. Home prices have risen 71% since February 2012.12 Why have home prices risen faster recently than at any time in history? Will prices stop going up soon, or even begin to fall? Knowing the answer to these questions would be financially advantageous and so we would all be wise to turn to, well, Robert Shiller. Alas, Shiller’s otherwise interesting piece can’t mask his frustration. “Economics provides few answers” to these questions, he concedes. “It is difficult to predict.” “It’s impossible to time the markets reliably.” And so on. It’s worrisome that Shiller’s article bemoans not only frothy housing prices. Shiller warns that U.S. stocks are quite expensive, too.

If we can’t hope to time the market, what can be done to prudently navigate a world of expensive houses and stocks – things that typically and almost necessarily consume substantial parts of the balance sheets of financially successful people?

The housing problem is both psychologically and financially stressful. Would-be buyers can certainly choose to rent instead of buy, but renters are then at the mercy of potentially capricious, unresponsive landlords. Perhaps more importantly, Bay Area rents are among the highest in the nation. There is only so much price pressure alleviation for those who still have to commute to a relatively nearby workplace to earn a paycheck. The bolder option is to flee California (and family and friends) so as to buy a nice, cheap house in, say, Texas. This is apparently becoming a trend, and it is in keeping with the conclusions of a recent Public Policy Institute of California study in which 61% of respondents said housing affordability is a big problem, and 33% said housing costs are making them seriously consider moving out of the state.13 One way for the curious to test the flows in and out of the state is by surfing the U-Haul truck rental web site. It shows today that 1-way rentals taking San Franciscans to Texas cost 4 times as much as rentals going the other way.14

Solving the “stocks are expensive” problem seems also to be a matter of one’s willingness to endure dislocation from familiar, backyard terrain. Using Shiller’s favorite valuation metric, the cyclically adjusted price earnings (CAPE) ratio, U.S. stocks trade at 37 times recent earnings while non-U.S. developed market stocks trade at a multiple of 20. Any newspaper will quickly confirm that, all else being equal, investors might well have good reason to prefer U.S. companies to those headquartered in, say, France or Japan. But U.S. and foreign markets have traded at similar multiples on average over the past 40 years, and 37 is not remotely equal to 20.15 At these disparate prices, investors are wise to maintain robust allocation to foreign markets. The same principle is at work within the U.S. stock market. The price to book (P/B) ratio of growth stocks in America is roughly 14.0. The 25-year average for this metric is 5.4. The current P/B ratio of value stocks is 2.7 against a 25-year average of 2.1.16 While there is considerable debate about the usefulness of P/B as a valuation metric, there is no doubt that growth stocks are quite expensive by historical standards and value stocks are not.

We have nothing helpful to say about the pros and cons of moving to Texas, but the fact that you get more housing there for less money is beyond dispute. Stock market investors are presumably less emotionally attached to familiar sights, and more eager to embrace asset classes which give the appearance of having superior investment prospects. In light of the wide pricing disparities on view in today’s markets, we share Shiller’s frustration that market timing still isn’t likely to be of much help. We also agree with his concluding recommendation that investors “make sure their holdings are thoroughly diversified” and include meaningful allocations to less highly valued markets.

1. S&P 500 Index: A market capitalization-weighted index that generally contains the 500 largest publicly traded stocks in the U.S., subject to certain restrictions. An index is unmanaged and not available for direct investment.

2. Russell 1000 Value Index: A market capitalization-weighted index composed of constituents in the Russell 1000 Index with low price to book ratios and lower forecasted growth rates. An index is unmanaged and not available for direct investment.

3. Russell 2000 Index: A market capitalization-weighted index of U.S. small cap stocks that consists of the 2,000 smallest publicly traded stocks in the Russell 3000 Index. An index is unmanaged and not available for direct investment.

4. Russell 2000 Value Index: A market capitalization-weighted index composed of constituents in the Russell 2000 Index with low price to book ratios and low forecasted growth rates. An index is unmanaged and not available for direct investment.

5. MSCI Real Estate Index: A market capitalization-weighted index measuring the total return of stocks in the U.S. Real Estate industry. An index is unmanaged and not available for direct investment.

6. MSCI ACWI Index: A market capitalization-weighted index that captures large and midcap companies in developed and emerging market countries, including the U.S. An index is unmanaged and not available for direct investment.

7. MSCI Emerging Markets Index: A market capitalization-weighted index that captures large and midcap companies in emerging market countries around the world. An index is unmanaged and not available for direct investment.

8. MSCI China Index: A free float-adjusted, market capitalization-weighted index designed to measure the performance of large and midcap equity securities in the Chinese equity market. A-Shares, H-Shares, B-Shares, Red Chips, and P-Chips may be included in the index. An index is unmanaged and not available for direct investment.

9. Bloomberg U.S. Aggregate Bond Index: A broad-based bond index that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government agency bonds, corporate bonds and securitized fixed income securities. An index is unmanaged and not available for direct investment.

10. Bloomberg U.S. TIPS Index: An index that measures the performance of the U.S. Treasury Inflation Protected Securities (TIPS) market. The index excludes any inflation protected securities held by the U.S. Federal Reserve. An index is unmanaged and not available for direct investment.

11. Bloomberg Commodity Index: This index reflects the return of a broad basket of commodity futures contracts with the collateral invested in 3 month Treasury Bills. An index is unmanaged and not available for direct investment.

12. Source:

13. Source:

14. Source:

15. Data as of 6/30/21. Median since 1981. U.S. stocks represented by S&P 500 Index, Foreign Developed by MSCI EAFE Index.  Source: Research Affiliates, Robert Shiller websites.

16. Data as of June 30, 2021; Russell 1000 Value Index and Russell 1000 Growth Index; Source: Bloomberg

Written by Jeff D. Lancaster, CFP®, Principal; [email protected]

Quarterly Review of Securities Markets: Total Return

Index17Market06/30/21 – 09/30/21Year-to-Date – 09/30/21
Standard & Poor’s 500Large Co. U.S. Stocks0.6%15.9%
Russell 1000 ValueLarge Co. Value U.S. Stocks-0.8%16.1%
Russell 2000Small Co. U.S. Stocks-4.4%12.4%
MSCI All-Country World ex U.S.Foreign Stocks-3.0%5.9%
Barclays 1-5 Year Gov’t/CreditU.S. Shorter-Term Taxable Bonds0.1%-0.3%
Barclays Aggregate BondU.S. Taxable Bonds (Broad-based)0.1%-1.6%
Barclays 1-5 Year Muni BondU.S. Shorter-Term Tax Exempt Bonds0.1%0.4%
JPMorgan Global Ex-U.S. BondsHedged Foreign Bonds0.0%-2.3%

Key Economic Indicators

  • The latest U.S. GDP report (second quarter 2021) showed the economy grew at a 6.7% annualized rate, as economic activity continued to pick up following last year’s sharp contraction. The first estimate of third quarter GDP will be released in late October, and economists are forecasting a 5% annualized rate for the quarter. Over the past several months, economists have reduced their expectations for GDP growth for all of 2021 due to the Delta variant of COVID-19. Current expectations for full-year growth are in the range of 5.5% to 6%.
  • U.S. employment data for June showed continued improvement. Nonfarm payrolls rose by 850,000, which was a larger increase than expected. Most of the unanticipated gains came from industries that were impacted the most by COVID-19, such as leisure and hospitality. Despite the improvement, the U.S. economy has still lost about 7 million jobs since the pandemic began. The unemployment rate increased slightly from the prior month to 5.9%, but the increase was primarily due to an increase in those looking for work.
  • The latest report on U.S. inflation (Consumer Price Index) showed an inflation rate of 5.3% in August versus the same month a year ago. The Core Consumer Price Index (CPI less food and energy) posted an annual increase of 4.0%. Inflation is expected to remain elevated for the next few months.
  • The Bloomberg Commodity Index gained 6.6% during the third quarter due primarily to a spike in natural gas prices of nearly 60% during the quarter. The price of oil rose marginally during the quarter, closing at $75 per barrel. Gold ended September at $1,775 per ounce, virtually unchanged from the prior quarter-end.

Key economic indicators compiled by Jeffrey Blanchard, CFA, Director of Research; [email protected]

17. Index Glossary:
Blomberg 1-5 Year Gov’t/Credit: A broad-based bond index that measures the non-securitized component of the US Aggregate Bond Index and targets bonds with maturities between 1 and 5 years. An index is unmanaged and not available for direct investment.
Bloomberg 1-5 Year Muni Bond: An Index that covers the USD-denominated tax exempt bond market with maturities of 1-5 years. The index includes state and local general obligation bonds, revenue bonds, insured and prerefunded bonds. An index is unmanaged and not available for direct investment.
JPMorgan Global Ex-U.S. Bonds: An index constructed of government bonds issued from developed countries outside the U.S. with the currency exposure hedged backed to the U.S. dollar. An index is unmanaged and not available for direct investment.


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