SEI recently released its third-quarter Economic Outlook. A summary of the conclusions is provided below:

  • The MSCI USA Index (a broad measure of U.S. equity markets) more than doubled since hitting a closing low on March 23, 2020. Outside of the U.S., equity market performance was not quite as stellar, but remains impressive.
  • What might be more surprising is the relentlessness of the advance in risk assets over the past 18 months. Waves of new infections around the world, the emergence of persistent shortages of goods and labor, inflation rates that have surged higher for longer than expected and the prospect of fading government relief in the months ahead have not derailed the stock-market rally. While it has often been said that bull markets climb a wall of worry, seldom have they climbed as high or successfully as the current one.
  • The summer COVID-19 wave did slow the U.S. economy’s upward momentum during the third quarter. The spread of the virus restrained consumers’ willingness to spend on restaurants, hotels, air travel entertainment and other services. Consumer spending accounts for approximately 70% of gross domestic product (GDP). At the beginning of August, GDP was on track to grow by a 6.1% seasonally-adjusted annual growth rate. It is now signaling an advance of only 3.7%.
  • Growth in personal consumption expenditures (a measure of consumer spending) decelerated sharply during the quarter, primarily due to a downturn in car sales as potential buyers were turned-off by the lack of supply and an extraordinary jump in prices. A drop-off in business spending on equipment and residential investment also led to decelerating economic growth. Supply chain issues along with key material and labor shortages also dampened production during the quarter.
  • Outside of the U.S., the challenges posed by COVID-19 and the disruptions to production have pushed inflation to levels not seen in many years in various countries. The immediate concern is the cost of energy. Natural gas prices have soared on the continent as shortages prevent the normal addition to reserves ahead of the winter season.
  • In the United Kingdom, fuel is in short supply as is the inability to deliver supplies to the gas stations as a result of a severe truck driver shortage. This has also resulted in long queues at the petrol pump.
  • Yet, we suspect that the gloom related to weakening economic growth may be overdone. Vaccines (including boosters) and improved treatments for severe COVID-19 cases are expected to limit the extent of hospitalizations and deaths, despite the Delta variant’s higher transmission rate than the original virus.
  • Once the latest COVID-19 wave passes, consumers’ spirits will likely revive. For example, households generally remain in good financial shape. Household wealth was at an all-time high, owing to booming stock and home prices.
  • While we believe that a rise in stock-market volatility is likely, we do not anticipate a return to the extraordinary levels of volatility reached at the March 2020 peak. Factors behind a near-term rise in volatility could include further easing of gross domestic product growth amid reduced fiscal spending, the tapering of asset purchases by the U.S. Federal Reserve (Fed), more bad news coming out of China and the seemingly never-ending Congressional battle over the infrastructure bills and the debt ceiling.
  • While supply chain disruption, lingering inflation and political dysfunction all present potential short-term headwinds, we believe that global economic growth will continue at a rate that significantly exceeds the sluggish pace that prevailed following the 2007-2009 global financial crisis over the next year or two.

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This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information is for educational purposes only and should not be relied upon by the reader as research or investment advice.

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Information provided by SEI Investments Management Corporation, a wholly owned subsidiary of SEI Investments Company (SEI).

Certain economic and market information contained herein has been obtained from published sources prepared by other parties, which in certain cases have not been updated through the date hereof. While such sources are believed to be reliable, neither SEI nor its subsidiaries assumes any responsibility for the accuracy or completeness of such information and such information has not been independently verified by SEI.