In his World Market Outlook, John P. Calamos, Sr., one of the world’s foremost financial experts, states that our economy is in the midst of a period of extraordinary recovery and that economic growth is moderating. and consumer optimism should come as no surprise. He adds that investors shouldn’t be surprised by the continued volatility and rotation of the markets. “This is an integral part of investing,” the Greek-American founder, president and global chief investment officer of Calamos Investments argues.

By John P. Calamos, Sr.

In the third quarter of 2021, economic and corporate fundamentals remained strong. Nonetheless, the markets were choppy and rotating as investors grappled with a difficult news feed.

Inflation fears intensified, supply chain disruptions persisted, and anxiety around the delta variant of Covid-19 continued. Economic growth has slowed from its double-digit pace and fiscal policy uncertainty has increased in the United States.

The Federal Reserve has announced that it plans to start scaling back its asset purchase program soon and has indicated that short-term interest rate increases could begin by the end of 2022. Bond yields the 10-year US Treasury topped 1.50% at the end of the quarter, as prices for oil and other energy-related commodities soared.

Many broad equity market benchmarks were generally flat or slightly down for the quarter, although returns from the start of the year through the end of September remained strong and positive. (For example, the S&P 500 Large Cap Index is up 15.9%, while the Russell 2000 Small Cap Index is up 12.4%.) Growth stocks ended the quarter with a slight gain while value stocks ended with a slight loss, masking the considerable upheaval that took place during this period.

Emerging markets faced more pressure as struggles at Chinese real estate developer Evergrande rocked the market. However, there were also some bright spots among emerging markets, like India.

Moderation in growth should come as no surprise

Earlier in the year, there were plenty of reasons to believe that inflation would be quite transient. As the economy goes through this unprecedented cycle, there is growing evidence that inflation will be more persistent, as businesses struggle to attract workers and supply chain disruptions continue.

However, there is a difference between the inflationary pressures that investors can mitigate through asset allocation (for example, increasing the allocation to equities, convertibles and high yield bonds) and the type inflationary pressures that could upset the economy. We think the first scenario still holds.

It’s important to remember that every cycle is different. Rising inflation and slowing growth have historically paved the way for “stagflation,” but this cycle is unlike any other. The global economy is in the midst of a period of extraordinary recovery, and moderation in economic growth and consumer optimism should come as no surprise.

We continue to see strong corporate balance sheets, improved margins and capital spending. The shadow of Covid persists, but we remain hopeful as global vaccination efforts continue and emerging treatments show promise. While we can never rule out a policy error, we expect the Federal Reserve to continue on a gradual path that should continue to support economic growth and, in turn, provide favorable winds for the stock market.

As the economy shifts from a rapid expansion to a mid-cycle growth phase, investors should not be surprised by the volatility and continued market rotation. These are a normal part of the investment.

Over the past year, for example, the market has risen significantly, but these gains have been a roller-coaster ride with many declines along the way. Markets could become increasingly turbulent, especially cyclical areas linked to interest rates and economic growth.

Market outlook depends on US fiscal policy

US fiscal policy remains a major risk to the short- and long-term outlook. Reasonable regulation and tax policy are essential to maintain business confidence, job growth and household prosperity. There are many unknowns on the fiscal policy front and political tensions are high as the timetable for infrastructure and social policy programs has been pushed back further. However, uncertainty over fiscal policy – or interest rates – is no reason to sit on the sidelines.

There are always opportunities, especially for experienced and active managers. At Calamos, we remain positioned to navigate these cross currents, capitalizing on the long-term opportunities generated by short-term volatility. We remain focused on selecting individual securities and understanding the thematic favorable winds that will drive markets and the global innovation that is taking place in each economic sector.