Monthly Market Insights: Progress Toward Recovery

By Ankur Patel

US stock markets continued their climb in November, with the S&P 500 and Nasdaq both up 20% year to date. However, with uncertainty about the spread of the new COVID variant Omicron, plus a more hawkish (less supportive) tone from Federal Reserve Chair Jerome Powell on Tuesday, market volatility rose once again. No matter how you look at it, it’s been a year of yo-yoing, between vaccines and variants, re-openings and restrictions, demand and inflation, and ultimately, fear and hope. Yet throughout all the ups and downs, a common theme has emerged. And that’s progress, even if it means taking one step back for every two steps forward.

Progress in the economy…

We started the year with high hopes of getting back to normal. Vaccines felt like permission to reopen the economy. US GDP grew by 6.3% and 6.7% in the first two quarters, respectively. But supply chain issues caused a slump, and the economy grew only 2.1% in the third quarter.

Unemployment in the US has come down from 6.7% at the start of the year to 4.7% in November, but at the same time, more than 4 million people have dropped out of the workforce. And out of those, 2.4 million have retired early! With plenty of jobs available, will people come back into the workforce soon, or will a lack of workers lead to further supply chain issues, higher wages, and continued inflation? If a tight labor market persists, the Fed may have trouble navigating inflation while working toward its mandate for “maximum employment."

But the good news is, even if the US doesn’t get back to pre-pandemic levels of employment, the surge in productivity growth and investment in technology that we’ve seen recently may turn into another long-term trend in the fight against inflation. It's also comforting to remember that globalization and aging demographics — two more trends that have historically helped keep inflation low — are still on our side as well.

…and progress in the markets

As mentioned, stocks have continued to recover from last year. After the S&P 500 ended 2020 up 16% and the Nasdaq up 44%, they’re both up by more than 20% so far in 2021.

Unfortunately, things haven’t gone as well overseas. Developed markets outside the US (as measured by the MSCI EAFE) are up only 6.5% in 2021, while emerging markets (MSCI EM) are down 5.1%. That’s due to lower vaccination rates and a slowdown in China, both of which have dampened global recovery.

Bonds have been, well, bonds — boring, but safe. Broad market US bonds (AGG) are down 1.4% so far this year, as interest rates have come back up from nearly 0% in 2020, but municipal bonds (MUB) have weathered higher interest rates and are up 1% so far. One potential reason: higher demand from investors with the potential for higher taxes next year.

What will happen next remains uncertain. Powell recently made comments about tapering monthly bond purchases sooner than expected, thanks to the strength of the economy and inflation. Now, markets are pricing in (expecting) at least two interest rate hikes for next year, with the potential for three by December 2022. But if there are employment challenges or slower economic growth due to variants like Omicron, can we really guess how aggressively the Fed will increase rates next year? One thing we can count on is that they’ll adapt to the situation, regardless of whether they’ll stay “behind the curve."

An even brighter future

And yet, there's still more room for progress. A common question we hear from clients is, “With markets at all-time highs, can things really get better from here?” The short answer is yes, they could, because we are by no means on the other side of this pandemic; Omicron is only the latest hurdle. At home, supply chain issues and inflation continue to tap the brakes on economic recovery, and labor market participation is still far below pre-pandemic levels. And while vaccinations in the US are approaching 70% for those with at least one dose, globally, the figures are closer to 54%. Recovery outside the US has much more room to run. Imagine how the global economy would be faring right now if all of these things were resolved (or least further along).

Progress is rarely a straight line. And as we’ve seen this year, there will be bumps along the way, with back steps and forward steps, fits and starts. But slow, uneven progress is still progress.


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Ankur Patel

Ankur is a CFA® charterholder with more than 15 years of experience working in investment and wealth management. As Vice President of Ellevest Private Wealth Investments, Ankur partners with our financial advisors to build and implement portfolios for our private wealth clients.