An Abnormal Return to Normal

Weekly Market Update | October 25, 2021


Global equities (as measured by the MSCI AC World index) gained 1.3% last week – just 0.8% shy of their all-time high. In the U.S., the S&P 500 rose 1.6% while the NASDAQ climbed by 1.3%. Non-U.S. markets posted modest gains as well with European stocks adding 0.9% and Emerging Market stocks rising 0.7%. Bond yields rose, driven by higher inflation expectations. The 10-year U.S. Treasury yield traded above 1.7% mid-week but closed the week at 1.64%.

Investors remain concerned about ongoing supply chain issues, elevated inflation, and slowing growth. However, each of these issues are at least partially a result of elevated demand amid constrained supply. While U.S. real gross domestic product (GDP) for 3Q 2021 is likely to reflect these issues – potentially falling to an annualized rate that is sub-3.0% – these issues also reflect an economy that is starting to normalize.

As the economy normalizes, so should Federal Reserve monetary policy. With inflation likely to be more persistent due to more-persistent supply bottlenecks, the Fed will likely want to embark upon the tapering of its bond purchases so it is not faced with a scenario where policymakers want to hike rates, but are still fueling monetary stimulus with bond purchases. The market is now expecting two rate hikes in 2022 and three in 2023. Citi Research’s base case remains one rate hike near the end of 2022.