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Third Quarter 2021 Newsletter



"Tapering" has been in the news lately, but what exactly is it, and why is it newsworthy? A quick review of some of the coronavirus-related monetary policy events may help in understanding how we got here:

  • January 2020: A novel coronavirus reaches the U.S.
  • February 2020: February 28, stock markets report their largest single week declines since the 2008 financial crisis.1
  • March 2020: On March 3, the Federal Reserve (the Fed) lowers interest rates half a percentage point to 1-1.25%. The S&P 500 drops 7% (triggering a trading halt for 15 minutes) on March 9 and again on March 12. On March 15, the Fed lowers rates one full percentage point to 0-0.25% and initiates quantitative easing (QE), buying billions in Treasuries and mortgage-backed securities each month in an effort to add new money to the economy and keep markets functioning after faltering from fear and uncertainty.
  • June 2020: The Fed establishes a pace of buying $80 billion of Treasury securities and $40 billion of mortgage-backed securities each month.2
  • Today: The Fed's purchases have brought its balance sheet from 4.31 trillion dollars in March 2020 to 8.36 trillion as of September 2021.3

The Fed recently indicated they will begin tapering, or gradually backing off their purchase plan, essentially tightening the purse strings and injecting a little less cash into the economy. Tapering is usually proposed when an economy has recovered from a recession, and as we reported last quarter, the coronavirus recession officially lasted from February 2020 to April 2020, making it the shortest U.S. recession ever.

Why has this been so newsworthy? In part, some investors worried there would be a repeat of the 2013 "taper tantrum" (and that name alone is newsworthy). In 2008, the Fed implemented these purchases in response to the financial crisis and recession. When the Fed announced plans to taper in 2013, investors were shocked and upset that the loss of this large buyer would depress bond prices. In response, bond investors sold their bonds, causing prices to fall—before the tapering had even begun!

We would argue that the Fed's tapering announcement was not newsworthy, but that doesn't mean it isn't helpful to understand the concept. Call if you ever have questions about how monetary policy can impact your investments.


Health Savings Accounts (HSAs), available to those with high-deductible health plans (HDHPs) who are not yet enrolled in Medicare, offer a unique triple tax advantage for savers: tax-free contributions, tax-free growth and tax-free withdrawals when used for eligible health expenses.

Obvious HSA-covered expenses include doctor visits, hospital stays and prescription drugs, but here are some lesser known uses for HSAs:

  • COBRA premiums to continue health coverage after leaving a job
  • Some long-term care insurance policy premiums
  • Medicare Parts B and D premiums, copays and co-insurance
  • Travel for medical treatment
  • Alternative treatments like acupuncture and chiropractic care
  • Home improvements to accommodate a disability
  • Lead-based paint removal
  • The medical care portion of a retirement community's entrance fee/life-care fee/ "founder's fee"
If you are unsure if you qualify or if this unique savings tool is right for you, give us a call.


Economic growth slowed considerably in the third quarter of 2021 as the Delta variant of COVID-19 engulfed the country. Real gross domestic product (GDP) increased at only 2% for the third quarter after the first and second quarters' respective 6.3% and 6.7% growth rates. We believe U.S. economic growth could continue to be anemic as long as COVID infections, hospitalizations and deaths in the United States remain higher than those in other advanced economies.

COVID is likely to be endemic in the United States, but the portion of the population that has already been vaccinated combined with those newly and soon-to-be vaccinated due to recent mandates should help the U.S. develop herd immunity. We do not believe the economy can get "back to normal" until the major threat of contracting COVID is reduced. There has been significant progress in treatment options, and both Pfizer and Merck have announced positive results from their oral antiviral treatments. Between the combination of vaccinations and high-quality treatments, it looks like we could be back to normal in the beginning of 2022.

"Help wanted" signs are still numerous as you drive down the street, but more people are gradually getting back to work. The labor market continues to surprise in both directions; a disappointing September report was followed by a show-stopping October report, with 531,000 jobs added in October and the unemployment rate falling to only 4.6%! The labor participation rate remains about 1.7% lower than February 2020, indicating that a significant number of people have decided not to re-enter the labor market yet. This could be for a myriad of reasons including lack of childcare, health-related fears, increased early retirements, and—until recently—enhanced unemployment benefits. Now the flip side of a low supply of willing workers is that wages have been trending up, especially for the lowest paid positions in the hospitality industry. Through the first half of 2021, wage growth for the lowest-income quartile has outpaced wage growth for the top 75% of earners by the widest margin since the late 1990s (Source: Atlanta Federal Reserve Wage Tracker).

Supply chain bottlenecks continue to cause problems throughout the economy. At the start of the pandemic, U.S. spending transitioned away from travel and services and into even more retail and consumer goods than we typically buy, causing the amount of goods being imported into the U.S. to surge. The transportation sector—especially the major U.S. ports and the trucking industry—has been particularly affected. We have seen numerous news reports on the backlog of cargo ships on the West Coast of the U.S.; the Biden administration has even gotten involved to help the ports transition to a 24/7 operation.

However, this backlog has caused shipping and freight costs to skyrocket, adding to inflationary pressures throughout the U.S. How much of our current increased inflation rate is transitory or not will have a lot to do with how long these backlogs persist. These supply chain issue should eventually work themselves out as individual companies make decisions about how to deal with different aspects of their issues, whether by running more hours or sourcing from different suppliers. In the end, companies do not want their products delayed any more than their consumers do.

Congress recently passed and Biden plans on signing a $1 trillion dollar "hard infrastructure" bill. This bill includes provisions for roads, bridges, ports, rail transit, power grid improvements and broadband internet access for rural areas. This bi-partisan agreement passed with both Republican and Democratic support. There were no direct tax hikes in the bill, which will be paid for primarily by repurposing unspent COVID-19 relief aid but is projected to increase the deficit over the long term. The bill should be stimulative to these areas of the economy, especially construction and infrastructure-type companies. Now that this bill is passed, Congress will now turn to their "soft infrastructure," Build Back Better reconciliation bill. This is expected to be anywhere from $1.5-$2 trillion dollars of new spending on subsidized child care, enhanced child tax credits, universal pre-K, expanding Medicaid and reducing carbon emissions. There are tax increases on corporations and higher earners in the Build Back Better framework, but nothing is final yet. Most of the proposed individual tax hikes appear to be centered on extremely high income earners and on corporations; the proposal includes tax surcharges for those earning $10 million or more a year, as well as a 15% minimum corporate tax. However, the tax hikes in the Build Back Better bill framework are not enough to cover its entire cost, so the bill is projected to add to the debt and deficit over time.

There is a concern that in combination these two bills may increase already higher inflation over the long run. While that is a risk, keep in mind that both of these bills include spending that will be injected over a 10-year timeframe, so not ALL of the funding is being dumped into the economy the day the bill is signed into law. While these spending bills are likely to be somewhat inflationary, we do not believe they will cause persistently high inflation moving forward.


If your holiday traditions involve gift-giving, hopefully you have already begun your shopping (or, even better, that you will be wrapping up soon). Stores continue to face supply chain issues spurred by pandemic shutdowns, labor shortages, pent-up consumer demand and even bad weather, causing shipments to arrive days, weeks or months late. Shoppers who wait until the last minute to purchase Christmas gifts will risk not getting their top choice items, paying a premium or, worse, going home empty-handed.

Another thing to plan for is slower but pricier shipping. USPS implemented slowdowns on some first-class mail and also increased prices for commercial and retail shipments for the holidays (October 3 through December 26). If you have a loved one whose heart is set on a specific gift this year, shop now. For everyone else, maybe this is the year to gift creatively, like a made-from-scratch family recipe delivered in a beautiful new pan; tickets and gift cards for a thoughtfully planned outing together; or something you spotted that simply made you think of your loved one. Ultimately, it's the thought that counts, but it doesn't hurt to plan ahead.

Important Disclosures

This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

Investing involves risk including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.

U.S. Treasuries may be considered "safe haven" investments but do carry some degree of risk including interest rate, credit, and market risk. They are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.

International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.

The Bloomberg Barclays US Aggregate Bond Index is a broad-based benchmark that measures the investment-grade, U.S. dollar-denominated, fixed-rate taxable bond market, including Treasuries, government-related and corporate securities, mortgage-backed securities, asset-backed securities and collateralized mortgage-backed securities.

The Bloomberg Barclays US Corporate High Yield Index measures the USD-denominated, high yield, fixed-rate, corporate bond market. Securities are classified as high yield if the middle rating of Moody's, Fitch, and S&P is Ba1/BB+/BB+ or below, excluding emerging markets debt.

Gross domestic product (GDP) is the monetary value of all the finished goods and services produced within a country's borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments, and exports less imports that occur within a defined territory.

The MSCI EAFE Index is a capitalization-weighted index that tracks the total return of common stocks in 21 developed-market countries within Europe, Australasia, and the Far East.

The MSCI Emerging Markets Index captures large and mid cap representation across 26 Emerging Markets (EM) countries. With 1,404 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country.

The Russell 2000 Index measures the performance of the small cap segment of the U.S. equity universe and is comprised of the smallest 2000 companies in the Russell 3000 Index, representing approximately 8% of the total market capitalization of that Index.

The Russell 1000 Index measures the performance of the 1000 largest companies in the Russell 3000 Index, which represents approximately 92% of the total market capitalization of the Russell 3000 Index.

The S&P 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

Asset allocation does not ensure a profit or protect against a loss.

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