economic perspective

November 2021


By Stephen Rich

All three of the major markets have provided an extraordinarily good year for equities, with the Dow Jones Industrial Average, Nasdaq and S&P 500® Index finishing October at all-time highs. Several events have led to these record highs, including the rollout of Covid-19 vaccines; unprecedented government fiscal and monetary support; strong consumer balance sheets; sturdy consumer spending; and robust corporate earnings. Building in the background, however, are some potentially unfavorable trends that the market has largely shrugged off. These include the growing fear of inflation due to supply-chain disruptions; a stubborn labor market; decelerating Gross Domestic Product (GDP); historically high valuation in the equity markets; and a slowdown of the Chinese economy. Mutual of America Capital Management LLC takes a look at these issues and explores how they may influence market movements in the upcoming months and into 2022.

With the backdrop of a strong U.S. economy, during October, equity markets further added to the gains achieved in the first three quarters of 2021. The S&P 500 reached five all-time highs in October, for a total of 59 all-time highs since the end of December 2020. Since 1929, there have been only three other years in which the S&P 500 had more record closes: 1964, with 65 record closes; 1977, with 77; and 2017, with 62. Not surprisingly, the S&P 500 returned 24.0% for the year-to-date through October 31, 2021. Over the same period, U.S. equity markets outperformed international equity markets, reflecting the earlier vaccination adoption success in the U.S. U.S. small-cap value stocks were the best-performing segment of the equity markets during the first nine months of the year, given their high operating leverage to the reopening of the economy.



The 10-year U.S. Treasury bond yield has been on a rollercoaster this year, as investors debated whether inflation in the economy was transitory or permanent. To recap, yields began the year at 0.91%; hit a one-year high of 1.74% on March 31, 2021; fell to 1.17% by August 3, 2021; and rose once again to 1.55% by October 31, 2021. On a year-to-date basis through October 31, 2021, the 10-year Treasury was down 5.4%, and the 30-year Treasury declined 7.1%. At this point, the 10-year Treasury is back to prepandemic levels. In the year-to-date period ending October 31, 2021, the Bloomberg U.S. Corporate Bond Index and the Bloomberg U.S. Aggregate Bond Index fell 1.0% and 1.6%, respectively.

Taper Time

At the recent Federal Open Market Committee (FOMC) meeting in early November, Federal Reserve Chairman Jerome Powell announced that it would begin tapering—that is, slowing the pace of purchasing Treasuries and mortgage-backed securities (MBS)—in mid-November, at a pace of $15 billion a month ($10 billion in Treasuries and $5 billion in MBS), and will likely end in June 2022. Powell reiterated the distinction between tapering and tightening decisions, and noted that any discussion about raising interest rates is premature. However, his statement expressed that inflation is elevated, as a result of transitory factors, though some officials conceded inflation pressures may last longer than initially forecasted.

Fed Leadership

Uncertainty surrounding Fed leadership had been mentioned as a potential factor in the heightened bond market volatility. Powell’s term expires in February and previous administrations had generally made their Fed chair picks by early November. On November 22, President Biden finally announced that he was nominating Powell to serve a second term as chairman of the Federal Reserve, thereby providing policy continuity during a time of economic uncertainty, most notably seen with the surge in inflation to a 30-year high. The president also nominated current Fed Governor Lael Brainard, who was considered a leading contender to replace Powell, to serve as vice chair. The president’s decision to stick with Powell, a Republican, honors a tradition in which Fed chairs typically don’t change, regardless of which party controls the White House. Powell’s nomination is now subject to confirmation in the Senate, where he is expected to receive wide bipartisan support.

GDP Is Decelerating

During October, the first look at real third-quarter GDP was revealed, showing that the U.S. economy grew at an annual rate of 2.0% in the quarter. This figure missed expectations, as government stimulus is winding down, and spending on autos declined 53.9% at an annual rate. This is a dramatic slowdown from second-quarter growth of 6.7%, and it is anticipated that fourth-quarter growth will rise to 4.8%. Additionally, the Conference Board Consumer Confidence Index® posted a large decline, dropping from 115.2 to 109.3 in September.

Sluggish Labor Market

On the U.S. labor market front, in January of 2020, the labor force participation rate was 63.4%, but rapidly dropped to 60.2% three months later as the economy fell into a recession. Fast-forward to October 2021, and the labor force participation rate has risen to 61.6%, or 1.8 percentage points below its prepandemic level. Even with that rebound, there are still approximately five million fewer people employed in the U.S. than in January 2020.

It was hypothesized by some economists that when federal unemployment benefits expired and schools reopened at the beginning of September, there would be a return to normalization of participation in the labor force. However, this re-entry into the workforce has not yet occurred at a significant level. There is no single answer as to what is holding people back from the labor market, but it may be explained from a handful of different angles.

First, many people close to retirement decided not to return to work, due to healthcare concerns and lifestyle changes. It is estimated that 1.5 million people retired earlier than anticipated. Second, childcare is cited as an issue, as there is a lack of caretakers to meet demand, and the cost of care has increased. Therefore, some parents with young children are having a difficult time returning to the labor force. A third reason could be the accumulation of savings by households. Savings account balances rose significantly during the pandemic, allowing for more flexibility and selectivity for workers to decide when to go back to work.

Despite these challenges, there are reasons to be optimistic that the supply of workers will increase in the months ahead, especially if employers raise wages to entice workers to return. However, if the labor force participation rate does not pick up, the Fed may have to reevaluate its current position on full employment and wage inflation, as each may prove to be greater challenges than the Fed’s current expectations.

More Spending

On November 19, 2021, the House passed a $1.75 trillion social spending bill known as the “Build Back Better” Act. This is a scaled-back version of the bill that originally asked for $3.5 trillion, and which is earmarked for social and human infrastructure. While the final details of the bill are still subject to negotiation with the Senate, the House-passed bill includes spending (in the form of tax credits) on climate-related initiatives, universal pre-K, mandatory paid-leave; and increases in allowable State and Local Tax (SALT) deductions. To partially pay for the additional spending, the bill incorporates a 15% global minimum corporate tax and a 1% tax on stock buybacks, a 5% surcharge on taxpayers with adjusted gross income of more than $10 million and a 3% surcharge on AGI over $25 million. It is still unclear whether the bill will ultimately get approved. As of this writing, Senator Joe Manchin, a Democrat from West Virginia, said he will not support the bill until there is “greater clarity” about the impact it will have on the national debt and economy. Without his support, it is doubtful that the bill will pass the Senate.

The “Build Back Better” Act is in addition to the $1.2 trillion Infrastructure Investment and Jobs Act that was passed in August by the Senate and cleared the House of Representatives late in the evening of November 5. This was somewhat of a surprise because the Infrastructure Investment and Jobs Act had been held up in Congress by progressive Democrats in the House who insisted the “Build Back Better” Act should be passed first. Ultimately, President Biden signed the Infrastructure Investment and Jobs Act into law on November 15.


With continued fear of a rise in inflation, three well-known inflation gauges all showed heightened levels in September: 1) The Bureau of Economic Affairs’ Personal Consumption Expenditures (PCE)—the Fed’s preferred inflation gauge—is up 3.6% year over year; 2) the Consumer Price Index (CPI), the most widely recognized gauge, was up 5.4%; and 3) the Producer Price Index, which sometimes predicts the direction of consumer prices, was up 8.6%. All of these inflation gauges exceed by a wide measure the Fed’s average inflation target of 2.0%.

Inflation also can be seen in other areas of the economy. Housing prices in the U.S. are up 19.8% from a year ago, according to the most recent (July) report from S&P CoreLogic Case-Shiller. Home prices are now spilling into the apartment market, where the median rent is up more than 10% since the pandemic low.

Supply Chain

Supply-chain issues also have added to the heightened concern about inflation over the last year. This includes global chip shortages due to supply-chain disruptions caused by the Covid-19 pandemic, a sharp rise in demand for electronic goods as more people are working from home, and a lack of investment in chip manufacturing capacity. Industries most hurt by the chip shortage include automotive; and technology (especially computers, cell phones and video game manufactures). Shipping and transportation also have been affected by mounting supply-chain issues due to a shortage of dockworkers and truckers. As of early November, there were at least 100 ships waiting to dock and unload at the ports of Los Angeles and Long Beach. The delays in shipping have increased costs for consumers and diminished the availability of goods as the holiday season nears.

Global GDP

Looking overseas, China’s GDP figures were released on October 17, 2021, and they indicate that its growth slowed to 4.9%. This was much slower than the 7.9% rate registered in the second quarter of 2021. One of the major headwinds facing the Chinese economy is the real-estate slump precipitated by the liquidity crisis at China Evergrande Group, an enormous developer with approximately $300 billion in liabilities, which is selling properties to meet bond payments. Goldman Sachs estimates that China’s property sector and other housing-related industries make up approximately 25% of that country’s GDP. Some initially feared that what is happening with Evergrande might trigger a Lehman Brothers-like risk event that led to the bankruptcy and failure of the investment bank during the financial crisis of 2008–09. While it has certainly slowed China’s GDP, it looks as though Chinese officials have dealt with the situation to date

Equity Valuations

The earnings recovery in the first half of 2021 was among the most remarkable in the modern history of the equity markets. Most macroeconomists started the year estimating that the S&P 500 would earn $175 a share, basically returning to prepandemic estimates set in 2019. Now, their estimates are at more than $204 a share. This increase, which is the result of soaring revenue combined with a cost structure that was held flat through the pandemic, is similar to what happened after the financial crisis of 2008–09. Currently, the S&P 500 trades at a forward price-to-earnings (P/E) multiple of 22.6, which is evaluated relative to the historic range of 14 to 15 times for forward multiples. In other news, the biggest names in the S&P 500 keep getting bigger, as the five largest names in the Index—Microsoft, Apple, Amazon, Tesla and Alphabet—now have a combined market capitalization of $9 trillion, which is three times as large as all Russell 2000 Index constituents combined. The top five companies in the S&P 500 trade at 8.2 times sales, while the Russell 2000 Index trades at three times sales.


As the U.S. enters the final months of 2021, there remain a number of positives and negatives facing the economy and financial markets. On the positive side, the country has experienced a lower rate of Covid-19 infections, robust corporate earnings, strong consumer spending and low interest rates. On the negative side, there are higher levels of inflation, a sluggish supply of labor, decelerating GDP and supply-chain issues. Given these factors, we believe that the economy is on strong footing. With this in mind, we continue to favor value-oriented stocks, which have better valuation support. We will continue to monitor these issues and other events that might impact our outlook heading into 2022.

Stephen Rich is the Chairman and CEO of Mutual of America Capital Management LLC.

Past performance is no guarantee of future results. The index returns discussed above are for illustrative purposes only and do not represent the performance of any investment or group of investments. Indexes are unmanaged and not subject to fees or expenses. The index returns above reflect the reinvestment of distributions. It is not possible to invest directly in an index.

The views expressed in this article are subject to change at any time based on market and other conditions and should not be construed as a recommendation. This article contains forward-looking statements, which speak only as of the date they were made and involve risks and uncertainties that could cause actual results to differ materially from those expressed herein. Readers are cautioned not to rely on our forward-looking statements.

Mutual of America Capital Management LLC is an indirect, wholly owned subsidiary of Mutual of America Life Insurance Company. Securities offered by Mutual of America Securities LLC, Member FINRA/SIPC. Insurance products are issued by Mutual of America Life Insurance Company.

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