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Investment Letter

3rd Quarter 2021

The autumnal transformation is an annual reminder of change and one of the most widely enjoyed and celebrated times of the year. It is a season to enjoy the beauty of colors, cooler temperatures, and to be thankful for the rewards of a bountiful harvest. This year, the season of change is not limited to mother nature. Our communities, economy, and financial markets are also undergoing their own notable transitions as the global pandemic recovery evolves. 

During the 3rdQuarter, news on the health care crisis dominated the global landscape. International pandemic conditions varied across regions, and areas in Europe, Asia, and the Middle East reported the highest rates of infection as the quarter closed. Domestically, the pandemic evidence pointed to significant improvement across the U.S. Officials hope the worst of the crisis is behind us, and they are encouraged by the recent decline of the COVID-19 Delta variant threat. While mandates and health care initiatives are still solidly in place, we are observing a moderate economic recovery. The slow workforce return has been a concern and will be a lingering economic headwind, but travel, dinning, and entertainment are becoming commonplace activities again. In addition, social interaction fears have diminished and our country’s love for live sports has been on full display as record number of fans fill stadiums around the country. Despite the obvious progress toward normalcy, there are subtle long-term implications and questions about the post pandemic world.  Only time will unravel the pandemic’s true impact on our way of life, but just like mother nature, change is always on the horizon!

The financial markets also experienced a change in direction this quarter. After reaching 20 new all-time closing highs in the first two months of the 3rdQuarter and a 20% price increase from January 2021, the S&P 500 Index endured a September slump and a five percent decline from the last closing high of 4,536.95 points.  The index closed the recent period with a slightly positive total return of 0.58% and a year-to-date (YTD) total return of 15.92%. Unfortunately for investors, the September decline was broad based across most asset classes.  Domestic small company stocks and emerging market stocks sustained the largest losses while gains during the quarter were recorded in commodities, real estate stocks, and inflation protected bonds. Despite the pull-back in equities, the YTD 2021 performance for the major stock indices remained strong.  See the total return performance table for more information.

Product was modest but slower due to supply chain disruptions; labor market support was widespread, but shortages still exist; business and consumer spending were positive; manufacturing expanded; trucking and freight activity grew; the housing market remained healthy, but tight supply, high demand, and rising costs were challenges; travel and tourism activity varied; and agriculture and energy conditions were mixed but mostly positive.

The Federal Reserve confirmed the positive economic data in the recent Beige Book and the September 2021 Federal Open Market Committee (FOMC) meeting minutes. The Committee also stated that financial conditions remained accommodative reflecting policy measures to support the economy and flow of credit to households and businesses. While higher inflationary pressures were noted, they still considered these factors to be transitory. Based on the information, the Committee once again decided to maintain the target range for the federal funds rate at zero to ¼ percent. They expect to maintain this range for some time until labor market conditions and longer-term inflation reach their stated objectives.  The Committee did make a significant announcement in the September meeting minutes. They made their intentions known to reduce the asset purchase program soon due to the sufficient gains in the labor market. This action is important because it will provide the Fed more flexibility to react to future risks. As always, the Fed reaffirmed their commitment to monitor incoming information and adjust the stance of monetary policy if threats emerge.

We hoped for more guidance this quarter on the proposed fiscal policy changes (infrastructure and social program plans), but political negotiations continued to be arduous. Progress and details should be available in the coming months. Shortly after the quarter ended, policy makers were able to agree on a temporary funding package that averted a government shutdown and credit default until early December. The reprieve provides policymakers additional time to get the country’s budget issues sorted out, but the constant dysfunction in Washington does not inspire confidence. A failure to find a long-term solution could have significant impacts on payments and benefits for social security recipients, government workers, military servicemembers, and veterans.

As we enter the last quarter of 2021, our outlook for the U.S. economy and financial markets remains optimistic. It appears the best of the recovery is probably behind us, but healthy fundamentals and sufficient slack in the economy should promote moderate expansion conditions into 2022. Unfortunately, we expect short-term inflation to stick around current levels.  Consumers are already experiencing the strain of price increases, but relief should be forth coming as supply side logjams dissipate.  The decline toward the Fed’s long-term goal of 2% inflation is a likely outcome but reaching that goal will be a gradual process.   Despite the recent volatility in the financial markets, investor confidence should stabilize as COVID-19 variant uncertainties continue to ease.  We are hopeful the 4thQuarter will provide a treat rather than a trick this year. Historical performance of the S&P 500 Index from 1970-2020 gives an indication that favorable returns are likely for investors this quarter due to the 41 positive returns recorded each 4thQuarter over the 51-year period (average quarter return of 4.60%).

We expect the Federal Reserve to maintain current interest rates, and we believe their announcement to start tapering future bond purchases is an important pivot for accommodative policy. Taper, however, should not be confused with tightening. The balance sheet expansion will continue as the Fed plans to slowly reduce the amount of bonds they are buying, not shrink the balance sheet with sales. We believe this is the Fed’s way of testing the waters of monetary policy change with the goal of returning interest rates to a “normal” level.

The past has shown how fragile the global economy can be, and we feel there are numerous areas of concern for investors that include the following:  prolonged supply chain disruptions, labor market imbalances, unexpected Central Bank actions, fiscal policy uncertainties, sustained inflation, energy and commodity price shocks, political disfunction, extreme weather events, natural disasters, cyberattacks, terrorism, and escalating geopolitical tensions.  We are keeping a watchful eye on this list of significant headwinds and other threats as they develop.

Our investment philosophy remains based on the fundamentals.  We believe it is time---not timing---that matters most.  History shows the successful long-term investor is patient, weathers market swings, and adheres to a disciplined investment process that includes a diversified asset allocation strategy based upon a tolerance for risk and need for return.

Year-end tax planning season is here.  See the list below to identify some common strategies that can help reduce your tax bill.  

  • Take advantage of high Federal Estate and Gift Tax exemptions (expire in 2025).
  • Contribute the maximum amount to retirement plans.
  • Contribute to a 529 Plan.
  • Defer or accelerate income and expenses.
  • Gift appreciated property.
  • Maximize the itemized deduction benefit through additional charitable gifts.
  • Manage investment gains and losses.
  • Monitor tax liability estimates and adjust withholding/estimated tax payments to avoid underpayment penalties.
  • Consider a Health Savings Account (HSA) if you participate in a high deductible health insurance plan. Allows pre-tax savings to pay for qualified medical expenses.
  • Complete your Required Minimum Distribution (RMD) if applicable.
  • Consider a Qualified Charitable Deduction (QCD) from your IRA.
  • Consider converting traditional IRA assets to a Roth IRA. 
A financial check-up is a great way to evaluate your financial health, highlight adjustments needed, and develop and implement a plan for success. If you would like to discuss changes to your financial situation, year-end tax planning strategies, or have any questions, please contact our office.

In closing, I want to thank you for the opportunity of working with you and for your continued confidence and trust. 

With kindest personal regards, I am

Very truly yours,



 2021 Total Return Index Performance
 Asset Class
BofA/ML Three-Month U.S. Treasury
U.S. Bonds
Barclays Intermediate-Term Treasury
U.S. Large Co. Stocks
S&P 500
U.S. Small Co. Stocks
Russell 2000
International Stocks
MSCI EAFE (net div.)
Real Estate
DJ Select Real Estate Securities Total Return
Source: Morningstar

    U.S. Economic Data



6.7% increase (annual rate) – 2ndQuarter 2021



5.3% CPI (less food and energy) and 4.0% CPI (all items) over last 12-months ending August. (Energy index up 25%)


Interest rates

Federal Funds Rate range = 0.00 – 0.25%. Fed will maintain until labor markets reach Committee’s maximum employment level.



August 2021 data - Unemployment at 5.2%; non-farm payroll employment rose by 235,000 jobs; Labor force participation rate 61.7%; Job growth remained widespread with some deceleration.



Manufacturing activity expanded for the 16thconsecutive month; September ISM Manufacturing Index registered at 61.1; Suppliers reported difficulty meeting high levels of demand due to record-long raw material lead times, wide-scale shortages of critical material, rising commodity prices and transportation difficulties.


Business Spending

Private non-residential investment continued its strong rise;  New durable goods orders increased further (up 15 of the last 16 months).   


Corporate Profits

2ndQuarter 2021 - U.S. corporate profits increased by 10.5%. S&P 500 Earnings Per Share = $52.05.



August 2021 year-over year data - New home sales down 24.3%; Existing home sales increased dropped 1.5%; Median sales price of existing homes rose 14.9% ($356,700); Housing starts up 17.4%; Building permits increased 13.5%; Housing inventory decreased 13.4% from last year; Unsold current inventory = 2.6-month supply; MBA fixed 30-yr mortgage rates = 3.10% ending 09/29/2021.


Consumer Spending

Disposable income moderated; Consumer Confidence Index declined for the third consecutive month as the COVID Delta variant dampened optimism; Retail and food services sales increased year over year; Total vehicle sales continued to decline (low inventory); Personal durable spending softened while nondurable spending grew; Personal savings rate remained at a low level indicating higher spending habits.



Oil price (West Texas Intermediate) = $75.22/bbl – 09/30/2021 (3rdQT increase of 2.31%); Gas price (U.S. average regular unleaded) = $3.175/gal – 09/27/2021 (3rdQT increase of 2.72%)



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