Domestic Markets – 3Q21 Review

Domestic Markets – 3Q21 Review

A recap on what happened in the U.S. market during the last quarter.

The U.S. equity market (defined as the S&P 500) kept its quarterly win streak alive – if only by the slimmest of margins. The S&P 500 eked out a gain of 0.58% for the third quarter – the sixth straight quarter of positive returns. September is historically known for being a more volatile period for equity returns, and the past month was no exception. After reaching new all-time highs, stocks caught a mild case of acrophobia and subsequently declined -4.7% for the month. On a market cap basis, large caps outpaced small caps, while performance was mixed on a style basis – as large growth bested large value, small cap value held up relatively better in the quarter vs. small cap growth.

Having hit 54 record highs thus far in 2021, perhaps the S&P 500 was due for a pullback. In addition to seasonality, the wall of worry in September included peaking economic growth concerns, containment of the Delta variant, ongoing supply chain disruptions and associated cost inflation, and further confirmation on the Fed’s taper timeline. Equity investors also had to contend with a rally in bond yields, as the 10-year Treasury yield moved from 1.27% to 1.52% over the final two weeks of the quarter. While not yet at a level where bonds become an attractive alternative vs. stocks, steepening yields are typically not conducive for longer-duration growth stocks (which comprise a sizable percentage of the S&P 500 Index).   

Given the strength in household balance sheets, consumer demand trends remain robust for industries such as retail, industrial, and semiconductors. The challenges continue on the supply side – where logistics bottleneck and shortages in labor and materials are hampering production output. Recall just-in-time (JIT) inventory management systems? The underpinning to JIT is to keep as little inventory on hand as possible, which should lower storage expenses and boost margins. The downside to JIT is the potential for stockouts should there be a backup in shipment times…which is the current situation for many businesses. The following chart on container shipping highlights the supply disruption:

As producer prices outpace consumer prices, the result is lower margins and profits. Companies are faced with the decision to pass on these higher input costs to their customers or defend market share at the expense of earnings. Taking a step back, companies would rather be faced with not having enough supply to meet demand vs. having excess inventory in light of weak demand; that said, some degree of equilibrium on the supply/demand front is needed. The expectation is for these constrained supply conditions to normalize in the coming quarters – but it has already gone on longer than expected and may extend into 2022 for more specialized needs such as semiconductors.

Disclosures

Certain information contained in this communication constitutes “forward-looking statements”, which are based on Cambiar’s beliefs, as well as certain assumptions concerning future events, using information currently available to Cambiar.  Due to market risk and uncertainties, actual events, results or performance may differ materially from that reflected or contemplated in such forward-looking statements.  The information provided is not intended to be, and should not be construed as, investment, legal or tax advice.  Nothing contained herein should be construed as a recommendation or endorsement to buy or sell any security, investment or portfolio allocation.  Securities highlighted or discussed have been selected to illustrate Cambiar’s investment approach and/or market outlook. The portfolios are actively managed and securities discussed may or may not be held in client portfolios at any given time, do not represent all of the securities purchased, sold, or recommended by Cambiar, and the reader should not assume that investments in the securities identified and discussed were or will be profitable.

Any characteristics included are for illustrative purposes and accordingly, no assumptions or comparisons should be made based upon these ratios. Statistics/charts are based upon third-party sources that are deemed reliable; however, Cambiar does not guarantee its accuracy or completeness.  As with any investments, there are risks to be considered.  Past performance is no indication of future results.  All material is provided for informational purposes only and there is no guarantee that any opinions expressed herein will be valid beyond the date of this communication.