In his global market outlook John P. Calamos, Sr., one of the most prominent financial experts worldwide, says that our economy is in the midst of an extraordinary recovery period and a moderation of economic growth and consumer optimism should come as no surprise. He adds that investors should not be surprised by ongoing volatility and market rotation. “These are a normal part of investing,” the Greek American Founder, Chairman, and Global Chief Investment Officer, of Calamos Investments argues.
By John P. Calamos, Sr.
During the third quarter of 2021, economic and company fundamentals remained strong. Nevertheless, markets were choppy and rotational as investors grappled with a challenging newsfeed.
Inflation fears intensified, supply chain disruptions persisted, and anxiety around the Covid-19 delta variant continued. Economic growth moderated from its double-digit pace and fiscal policy uncertainty deepened in the United States.
The Federal Reserve announced it expects to begin tapering its asset purchase program soon and indicated that short-term interest rate increases could start by late 2022. The yield of the 10-year US Treasury bond rose past 1.50% by the end of the quarter, while the prices for oil and other energy-related commodities soared.
Many broad equities market benchmarks were generally flat or modestly down for the quarter, although year-to-date returns through the end of September have remained solid and positive. (For example, the large-cap S&P 500 Index is up 15.9%, while the small-cap Russell 2000 Index is up 12.4%.) Growth stocks closed the quarter with a slight gain while value stocks finished with a slight loss, masking the considerable turmoil that took place during this period.
Emerging markets faced more pressure, as the travails of Chinese real estate developer Evergrande roiled the market. However, there were also bright spots among the emerging markets, such as India.
Moderation of growth should come as no surprise
Earlier in the year, there were many reasons to believe inflation would be quite transitory. As the economy moves through this unprecedented cycle, there’s mounting evidence that inflation will be more persistent, as companies struggle to entice workers and supply chain disruptions continue.
Nevertheless, there is a difference between inflation pressures that investors can mitigate through asset allocation (e.g., increasing allocation to equities, convertible securities, and high-yield bonds) versus the sort of inflation pressures that could upend the economy. We believe the former scenario still holds.
It’s important to remember that every cycle is different. Rising inflation and slowing growth have historically set the stage for “stagflation”—but this cycle is like no other. The global economy is in the midst of an extraordinary recovery period, and a moderation of economic growth and consumer optimism should come as no surprise.
We still see strong corporate balance sheets, improving margins and spending on capital expenditures. The shadow of Covid persists, but we remain hopeful as global vaccination efforts continue, and emerging treatments show promise. Although we can never rule out a policy mistake, we expect the Federal Reserve to pursue a gradual course that should continue to support economic growth and, in turn, provide tailwinds for the stock market.
As the economy transitions from a rapid expansion to settle into a mid-cycle growth phase, investors should not be surprised by ongoing volatility and market rotation. These are a normal part of investing.
Over the past year, for example, the market has risen significantly, but these gains have been earned in a saw-toothed fashion with plenty of dips along the way. Markets could become increasingly choppy, especially cyclical areas that are tied to interest rates and economic growth.
Market outlook depends on US fiscal policy
US fiscal policy remains a key risk to both the near-term and the long-term outlook. Reasonable regulation and tax policy are key to sustaining business confidence, job growth, and household prosperity. There are many unknowns on the fiscal policy front and political tensions are running high as the timeline for infrastructure and social policy programs have been pushed back once again. However, uncertainty about fiscal policy—or interest rates—are not reasons to stay on the sidelines.
There are always opportunities, especially for experienced and active managers. At Calamos we remain positioned to navigate these crosscurrents, capitalizing on the long-term opportunities that short-term volatility produces. We remain focused on individual security selection and understanding of thematic tailwinds that will drive the markets and the global innovation that is taking place in every economic sector.