While the bull market still climbs, many nonprofit investors wonder if we should expect a change in the coming months. Third quarter U.S. equity returns were muted. We saw negative returns in small/mid cap and developed international equity over the period ending September 30. However, since then we have seen yet another rebound in risky assets.
Is volatility on the rise?
We believe so, but we do not anticipate a return to the extraordinary levels of volatility reached at the March 2020 peak. We see the U.S. GDP starting to slow down from high levels earlier this summer, combining with reduced fiscal stimulus from higher pandemic levels and tapering of asset purchases by the Fed. But long term strategic asset allocations should prevail, while under the hood, professional security selection is thinking about nearer term expectations.
Consumer spending represents 70% of U.S. GDP. At the beginning of August, GDP was on track to grow 6.1% at a seasonally adjusted rate, but it's now signaling levels closer to 3.7%. The deceleration can be attributed to a sharp decline in car sales, as the lack of supply and increased prices are deterring potential buyers. In addition, there are declines in business spending on equipment and a slowdown in residential investment. Outside the U.S., the immediate concern is focused on significant increases in energy prices, especially natural gas, as labor shortages in the UK are causing gas station supply issues.
However, companies are reporting strong earnings, and market corrections have been normal throughout the year. While we do not anticipate a severe market correction, the increased volatility will give more opportunity for active stock pickers to add value as these economic trends unfold.
Long-term institutional investors like nonprofits can benefit by reviewing their asset allocation to determine if there are strategic opportunities, not represented currently, to help improve risk-adjusted returns. Examining various asset classes can bring a new angle or potential opportunity.
Consider questions like these with your investment provider:
- Is value making a comeback?
- Is there still room for success in private equity? (The short answer is yes)
- With rates poised to rise over the next few years, how much risk management should be implemented with fixed income?
The economic and equity outlooks below provide Insights into these questions. Discuss these issues in the context of your organizational risk and return profile with your attentive investment partners.
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