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2021 Q3 Market Review

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In a topsy-turvy third quarter of 2021, mixed results drove home an ever-present theme for long-term investors — the value of staying diversified.

On the one hand, healthy corporate earnings proved to be a tailwind for stocks in early summer. By quarter's end, though, a growing horde of speculative traders started to pull back as inflationary pressures ticked up and a stretched global supply chain threatened to dampen consumption. Manufacturers struggled to keep up with demand for products ranging from cars and computers to tissue paper and washing machines. As fall approached, energy prices kept climbing along with those for food and other basic grocery items.

In such an environment of heightened market volatility, larger American companies fared better than smaller ones. Indeed, the IFA U.S. Large Company Index produced a nearly 0.60% return in Q3. Meanwhile, its sister domestic benchmark capturing a key part of the market that academic research has identified as generating higher expected returns over time — the IFA U.S. Small Cap Value Index — slid by roughly 0.60% in the quarter.

It's also probably worth noting that despite a more volatile Q3, domestic small value stocks as tracked by the IFA index remained firmly on positive ground in 2021 with a year-to-date (YTD) return of more than 29%. In fact, the third quarter's outcome marked the first negative quarter for this asset class since markets were rocked by the worldwide coronavirus pandemic in Q1 of 2020. In particular, since September 2020 these stocks have been outperformers. (See table below.)

As we frequently observe on a sequential basis, performance over shorter time frames can vary greatly. For example, in Q3 developed international stock markets saw a flip-flop in outcomes from those based in U.S. markets. The IFA benchmark for large-cap foreign stocks finished Q3 with a slight drop, while two small-cap international domestic indexes landed in positive territory. 

Looking through a very narrow window as provided by one quarter's worth of results, the need to make sure all of your eggs aren't stacked in one investment basket remains omnipresent. As you read through the rest of this report's data, it might be helpful to keep in-mind how global diversification can help to enhance the value of an IFA Index Portfolio over time. 

The chart below illustrates findings from Dimensional Fund Advisors, which performed 20,000 bootstrapped runs of monthly returns from June 1994 through 2019 using indexes tracking foreign and U.S. stocks. Along with our review of the last quarter's performance numbers, it provides more evidence that taking a broader view of investing across asset classes — as opposed to focusing on individual stock picking — serves to increase your odds of financial success over time. 

Domestic Equities

IFA benchmarks for large-cap and large-growth stocks continued to climb during the third quarter, although at a slower pace. Meanwhile, value-styled stocks and small caps took a step back, breaking a string of five consecutive quarters of rising fortunes. Leading the way in Q3 were the IFA indexes covering domestic large-cap and large-cap growth stocks, which gained 1.38% and 0.57%, respectively. At the same time, the IFA benchmark tracking U.S. small-growth stocks performed the worst with a Q3 loss of more than 3%. In the quarter, IFA's U.S. Small Cap Value Index produced a slight loss. Through Q3, however, both small-cap and small-value benchmarks remained top performers year-to-date. 

International (Developed) Equities

IFA index returns from developed international markets were also mixed in Q3. The large-cap oriented IFA International Value Index had a return of -0.49% in the quarter. At the same time, sister small-cap blend and small-cap value indexes kept producing positive returns. The large-cap value benchmark led YTD with a gain of nearly 16%, followed by the IFA International Small Cap Value Index's 13.67% return. Just behind those two was the blended small-cap index, which through Q3 had a better-than 12% return on the year.

Real Estate Equities

U.S. REIT stocks gained more than 1% in Q3 while international real estate equities, which made up some 36% of the global real estate market's total value, lost steam in the quarter, according to Dimensional Fund Advisors. That translated into the IFA Global REIT Index taking a slight third-quarter dip. Even so, the benchmark remained ahead by nearly 17% entering 2021's fourth quarter. 

Emerging Markets Equities

Just like developed foreign markets, stocks in emerging markets ran into increased turbulence in the third quarter. The worst performer came on the blended large-cap side as the IFA Emerging Markets Index fell 6.82%. Meanwhile, the IFA Emerging Markets Value Index returned -3.35%. That was less of a loss than its blended sister index of small-cap stocks, which slid 4.13%. All three benchmarks remained in positive territory heading into Q4. Of note, the IFA emerging markets small-cap and value indexes still had double-digit percentage gains YTD through 2021's third quarter.    

Fixed-Income

In the third quarter, the 30-year U.S. Treasury rate increased by 0.01 of a percentage point to 2.08%. Meanwhile, the 10-year U.S. Treasury rate rose by 0.04 of a percentage point to 1.52% while the five-year U.S. Treasury rate increased by 0.09 of a percentage point to 0.98%. 

For Q3, IFA's fixed-income benchmarks were flat to slightly negative. The most noticeable movement took place in intermediate-term global bond markets. The IFA Five-Year Global Fixed Income Index returned -0.18%. Meanwhile, IFA's One-Year Fixed Income Index finished the quarter flat. If interest rates have fallen, the price of existing bonds can be expected to increase — so that new buyers receive the same current yield as that available from newly issued bonds at the lower rate with similar maturities and risk levels.

IFA Index Portfolios

With short-term volatility on the rise, IFA Index Portfolios finished 2021's Q3 with negative results. Through September, however, those portfolios showed positive gains on the year. (All of the returns of the IFA Index Portfolios shown below are net of the maximum annual 0.90% advisory fee through Sept. 30, 2021.) 

Each quarter, we monitor our recommended funds for clients. As part of that process, we've developed a rating system. For a summary of those results, please feel free to check IFA's Performance Monitoring Report (PMR). 

The wealth of IFA's educational materials are available for Apple iOS and Android devices via the IFA App. This free App is available to download from both the Apple App Store and the Google Play Store for Android. We've also created an Investing Kit that includes a copy of "Index Funds: The 12-Step Recovery Program for Active Investors" book and a documentary film based on the book. It also comes with a Galton Board (Stock Market Edition), which simulates the random distribution of 600 monthly returns of the IFA Index Portfolio 100. You can find the Investing Kit on Amazon.


Performance results for actual clients that invested in accordance with the IFA Index Portfolio Models will vary from the backtested performance due to the use of funds for implementation that differ from those in the index data, market conditions, investments cash flows, mutual fund allocations, changing index allocations over time, frequency and precision of rebalancing, not following IFA's advice, retention of previously held securities, tax loss harvesting and glide path strategies, cash balances, lower advisory fees, varying custodian fees, and/or the timing of fee deductions.

This is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product or service. There is no guarantee investment strategies will be successful. Investing involves risks, including possible loss of principal. IFA Index Portfolios are recommended based on time horizon and risk tolerance. Take the IFA Risk Capacity Survey (www.ifa.com/survey) to determine which portfolio captures the right mix of stock and bond funds best suited to you. For more information about Index Fund Advisors, Inc, please review our brochure at https://www.adviserinfo.sec.gov/