Navigating Shifting Crosscurrents: 4Q 2021 Outlook

3Q 2021 Global Equity Market Review

Internal rotations—regional, sector, and factor based—persisted through the third quarter. Global equity markets fell 1.0% during the quarter, which brought the MSCI ACWI Index’s year-to-date return to 11.5%. Developed equity markets started the quarter on an upbeat note. By early September, the MSCI World Index was up more than 5% for quarter. However, after a September sell-off, the index finished the quarter with a gain of just 0.1%. In contrast, emerging market equities never found their footing, and finished the quarter with a return of -8.0% (Figure 1). The dispersion of returns was wide, with the Indian equity market continuing its strong year-to-date run and returning 12.7% for the quarter. Conversely, the Chinese equity market returned -18.1% primarily because of the continued tightening of regulatory and monetary policy.

When the quarter began, markets were particularly concerned with the Covid-19 Delta variant and the Federal Reserve’s commitment to extending its highly accommodative stance under its new policy framework. At that time, we thought the market’s apprehension about the Fed was overstated. The Delta variant and the risk of ongoing economic disruptions were more troubling, although we were comforted by indications that severe cases in Europe were not soaring as they once had.

As the third quarter progressed, it became clearer that the Covid threat was receding. Global case counts dropped and news surrounding a new treatment from Merck increased optimism. Covid recovery names and cyclicals began to outperform. Unfortunately, visibility and confidence in the Fed’s monetary policy deteriorated, particularly in late September. Inflation readings accelerated, but we expected as much and believed the supply-side response would bring inflation back down as the global economy reopened. In September, two developments cast doubt on this view. First, a trading controversy caused two Federal Reserve Board presidents to step down, which increased the uncertainty surrounding future leadership and policy. Second, Chair Powell expressed less confidence that inflation was “transitory” and communicated an earlier-than-expected start and end to quantitative easing. This reset surprised the markets—bond yields rose, the yield curve steepened, and growth stocks in particular were pressured.