Q4 2021 Letter

During the September Federal Open Market Committee (FOMC) meeting, the Federal Reserve chose to delay announcing when they will start their asset-purchase tapering due to present economic uncertainties. Fed Chairman Powell commented however, it “may soon be warranted”, and expectations are that come November the Fed will start to slow its bond purchases. For now however, between the debt ceiling, budget debates in Washington and ongoing Covid-19 cases and deaths, the Fed chose to hold back on changing policy. The Fed’s projections are for interest rate hikes in 2023 and 2024, but their “dot plot” suggests it could happen sooner in 2022. When the time comes and they begin tapering asset purchases, it could push interest rates higher.

Stocks were strong during the summer months, but suffered losses during September due in large part to pandemic-related risks returning, and a slowing in hiring and consumer spending which raised economic risk. The S&P 500 showed a small gain for the third quarter, but was down nearly 5% for the month of September.

Enclosed our team shares insights on the developments over the third quarter of 2021 in the markets and economy. For additional in-depth analysis and to view recordings of our team on various local and national media outlets, visit our website RocklandTrust.com/Wealth&Investments.


Key Takeaways from Q3 2021:

  • Employment growth faced headwinds
  • The Federal Reserve indicates tapering is near
  • The Delta variant put pressure on current labor and supply chain shortages which was met head-to-head with increased consumer demand


US Economy

The US economy continued its strong pandemic recovery into the 3rd quarter. However, its path to recovery did not come without a few bumps in the road. As we entered into the summer months, COVID-19 cases and fatalities were down sharply and vaccination rates had improved significantly. The path to recovery was progressing as expected as economies around the globe reopened. Fears were reintroduced, however, with the emergence of the more contagious Delta variant, resulting in enhanced social distancing measures, increased masking, and delays of return to work. After a renewed focus on vaccines and with nearly two thirds of the population now having received at least one dose of the vaccine, coupled with those who have already contracted the virus, a large portion of the US population now has some immunity to the virus. This has led to a recent decline in both cases and fatalities – and with the upcoming administration of booster shots, we are optimistic that this pandemic will continue to have less of an impact on our economy as we move into 2022 and beyond.

While there is a lot to be optimistic about long-term, there are a few potential economic headwinds we will be watching closely as we head into the fourth quarter. For one, the beginning of the end of monetary and fiscal stimulus. Fed Chairman Powell has indicated the beginning of tapering and extra unemployment benefits are ending. There is also a low likelihood of additional stimulus payments. One caveat is that the Advanced Child Tax Credit has given Americans some financial relief as we head into the holiday season. Secondly, we are monitoring interest rate levels. With inflation starting to pick up, the Federal Reserve’s increasingly hawkish stance could mean that we see higher rates as we head into 2022. The implications of this will largely depend on our economy’s ability to absorb the increases without significantly impacting corporate earnings.

The third thing we are watching closely is the Delta variant and other potential future variants of the virus which could further pressure current labor and supply chain shortages. We are hopeful that these pressures will be transitory in nature as COVID-19 cases drop, manufacturing facilities ramp back up to full capacity, companies rebuild their inventories, and re-openings resume. And lastly, we are watching inflation and unemployment data closely as they are two of the Federal Reserve’s key mandates. The economy has recovered 77% of the 22.4 million jobs lost during the pandemic, but the latest unemployment rate published today still remains elevated at 4.8% versus the historic 3.5% level we saw pre-pandemic. Wage inflation has risen as demand has outpaced supply. Goods and services inflation has also picked up as a significant increase in consumer demand met head-to-head with supply chain shortages across many sectors of our economy. The combination of “longer lasting” inflation and supply chain challenges may impact corporate profits and growth in the near term, but underlying fundamentals of the economy still point to longer term growth.

We continue to monitor all risks for any near-term speed bumps but feel our portfolios remain well diversified and positioned to mitigate any unexpected risks in the long term.


Traditional Asset Class Returns Q3 2021

Asset Class Benchmark Q3

US Stocks

S&P 500


US Gov’t Bonds

BbgBarc US Govt Intermediate



BbgBarc US Treasury Bill 1-3 Mon


US Stocks

The S&P 500 delivered seven consecutive months of positive returns from February through August of this year. While the 3rd quarter started off strong with the index up 2.38% in July and 3.04% in August, the market finished down -4.65% in September to bring the return for the quarter to 0.58%. September has historically been the weakest month for the stock market and the trend held true in 2021 as we witnessed the worst month since March of 2020. There are many factors that are contributing to September’s pullback including the Delta variant, the government debt ceiling, supply chain issues, input cost inflation, a spike in energy prices, debt repayment issues for Chinese developer Evergrande, and a Federal Reserve that has indicated it will begin tapering asset purchases this year which could push interest rates higher.

Despite September’s volatility, the small quarterly gain helped pushed the S&P 500’s year-to-date return to 15.92%. These gains follow a 31.49% return in 2019 and an 18.40% return in 2020. The S&P 500 has now compounded at an incredible 15.99% and 16.90% per year over the past three and five years, respectively.

Seven out of 11 sectors in the S&P 500 posted positive returns for the quarter. The Financials (+2.74%), Utilities (+1.78%), and Communication Services (+1.60%) sectors were the top performers, while the Energy (+1.66%), Materials (+3.51%) and Industrials (-4.23%) sectors were the laggards.

From a market capitalization standpoint, Large and Mid-Cap Stocks (Russell 1000 +0.21%) significantly outperformed Small Cap Stocks (Russell 2000 -4.36%) in the quarter.

From a style perspective, Growth stocks (Russell 3000 Growth +0.69%) outperformed Value stocks (Russell 3000 Value -0.93%). However, Value stocks are still outperforming Growth stocks by nearly 3% year-to-date as a re-opening economy has caused investors to flock towards sectors that are more sensitive to the pace of economic growth.    


US Bonds

When investors observe that interest rates and investment grade credit spreads finished nearly unchanged from where they started the quarter, it might lead many to assume it was a quiet three months when in actuality it was a quarter filled with volatile headlines. At the end of the 3rd quarter the 10-year US Treasury yield was at 1.49%, only 2 basis points higher than it was on June 30, 2021, and the Bloomberg Barclay’s US Credit Index spread widened only 1 basis point over the same time period.

Throughout the quarter, broadcasts of continued inflationary fears, waning economic optimism, and the potential for tighter monetary policy by the Federal Reserve had the bond market in flux. As investors became increasingly more concerned about a weaker than expected recovery, the 10-year US Treasury yield hit a quarter low of 1.17% in August. A few short weeks later at the September Fed meeting investors were given a boost of confidence when Chairman Powell reiterated the Fed’s belief that the economy is continuing to strengthen and signaled they would begin to taper their bond purchases as soon as November. Powell also stated the committee believed inflation to remain transitory and should subside next year with the inflation forecast for 2022 being projected at 2.2% versus 4.2% for this year.

With minimal rate and spread movement, we saw returns near zero for US Government and high grade credit indices for the quarter. High Yield continues to have the strongest performance for both the quarter and year to date as strong economic data continues to cause spread tightening of lower quality – higher risk securities.

Historically interest rates tend to rise and fall along with expectations of growth and inflation. As we head into year-end, we shall see if we follow that historic trend as the Central Bank remains active in trying to balance two of their main objectives; keeping inflation in check and achieving maximum employment.


Diversifying Asset Classes

Equity diversification was challenged in the quarter. Real Estate and Commodities were among the only two equity asset classes to outperform the S&P 500. However, equity diversification has been more beneficial year-to-date as asset classes such as MLPs (+39.40%), REITs (+22.15%), and Mid-Cap Value (+21.01%) have benefitted from the global recovery and have significantly outperformed the S&P 500.

Fixed-income diversification was a mixed bag in the quarter. Inflation-protected bonds (TIPS), High Yield bonds, and Floating rate bonds outperformed the Bloomberg US Government/Credit Intermediate index, while Emerging Market bonds, International bonds, and Convertible bonds all underperformed. However, fixed income diversification has been extremely beneficial year-to-date as nearly every fixed income asset class outside of Emerging Market and International bonds has outperformed.


Asset Class Benchmark Q3

Foreign Stocks



Emerging Markets Stocks

MSCI Emerging Markets


US Mid Cap Stocks

Russell Mid-Cap


US Small Cap Stocks

Russell 2000






Bloomberg Commodity



Alerian MLP


Managed Futures

Credit Suisse Mgd Futures Liquid TR


Foreign Bonds



Emerging Market Bonds



US Inflation Protected Bonds

BbgBarc US Treasury TIPS


Floating Rate Loans

Credit Suisse Leveraged Loan


US High Yield Bonds

BbgBarc US Corp High Yield


Convertible Bonds

ICE BofAML Convertible Bonds




While there were some bumps in the road during the third quarter, it isn’t all doom and gloom. Analysts suggest while there may still be some challenging times ahead, the outlook remains positive. Earnings are expected to remain strong with margins up and sales holding; corporate earnings are expected to rise by 30% or more in the third and fourth quarters.  With continued medical advancements and an increase in consumer confidence, these positive trends may stay on track.

As always, our team is available to answer any questions and we remain committed to keeping you informed and ensuring your investments are appropriately positioned and well-diversified so you can meet your financial goals.



David B. Smith, CFA

Chief Investment Officer

Investment Management Group

Not Insured by FDIC or Any Other Government Agency / Not Rockland Trust Guaranteed / Not Rockland Trust Deposits or Obligations / May Lose Value