Quarterly Commentary



The S&P 500 hit new all-time highs again in the third quarter as investors looked past a resurgence of COVID-19 cases in the U.S. and instead focused on the positive combination of a resilient economic recovery, ongoing historic support from the Federal Reserve, and strong corporate earnings. Market volatility rose during the final few weeks of September, however, reminding investors that the transition to a post-pandemic “new normal” isn’t always going to be smooth.

S&P 500 Performance


Stocks moved steadily higher to start the third quarter as the U.S. economy continued to return to pre-pandemic levels of activity while corporate earnings remained solid. To that point, second quarter earnings results, which were released in mid-to-late July, were stronger than expected. Additionally, at the July FOMC meeting, Fed Chair Powell reiterated that, despite economic progress, it was not yet time for the Fed to begin to reduce Quantitative Easing (QE). Those factors helped investors look past an increase in COVID-19 cases as the S&P 500 hit a new all-time high in late July.

That positive momentum for markets continued in August, powered by similar factors:  Positive corporate commentary, solid economic activity, and continued supportive Fed rhetoric. Unlike during the COVID-19 waves of 2020 and early 2021, policy responses centered on mask mandates, and as such, the economic headwinds from rising cases were comparatively mild.

Politics became a focus of the markets in August. Prior to their summer recess, the Senate passed an outline for a $3.5 trillion budget reconciliation bill that would be the framework for potential changes to tax rates, entitlements, and climate policy. Given that, stocks were able to look past future policy risks and climb steadily higher throughout the month.

The market tone changed in September, however, as many of the positive factors that supported stocks earlier in the quarter began to fade. First, corporations began to issue warnings about future profits. Cited more than anything else was constraints to supply chains. Pictures of container ships sitting idle outside US ports caused investors to become more concerned about the outlook for earnings. Next, economic data from August began to show that the rise in COVID-19 cases had weighed slightly on the economic recovery. Finally, after returning from their August recess, Senate Democrats unveiled new details on their $3.5 trillion spending and tax plan that included increases to the corporate tax, personal income taxes for high earners, and changes to capital gains and inheritance taxes. Volatility was further compounded by news that the second-largest property developer in China, Evergrande, was likely going to default on debt payments. Fear of potential financial market contagion hit stocks in late September and the S&P 500 suffered its first 5% pullback in nearly a year.


The last few days of the third quarter had a substantial impact on quarterly index returns. For the majority of the third quarter, the NASDAQ had solidly outperformed both the S&P 500 and the Dow Jones Industrial Average. During the last week of the quarter, as global bond yields rose, there was heavy selling in tech shares as investors rotated into other sectors. The NASDAQ still slightly outperformed the S&P 500 while the Dow Jones Industrial Average produced a negative return for the third quarter.

By market capitalization, large-cap stocks outperformed small-cap stocks in the third quarter. In fact, small-cap stocks had a negative return for the quarter as mixed economic data and the prospects of higher interest rates caused investors to favor large-cap stocks as the outlook for future economic growth became less certain.

From an investment-style standpoint, growth outperformed value during the quarter. Again, this largely due to tech sector gains, though the amount of that outperformance shrunk considerably in the final week or two.

On a sector level, performance was more mixed. Six of the eleven S&P 500 sectors realized positive returns in the third quarter, with financials leading the way. The prospects of higher interest rates were enough for financials to rally and overtake the tech sector. Healthcare also performed well, bolstered by strength in pharmaceutical stocks following more COVID-19 vaccine mandates and booster shot approvals. Sector laggards included the industrials and the materials sectors, both of which finished with negative returns. The lack of passage of the $1 trillion bipartisan infrastructure bill was a significant factor. Meanwhile, the materials sector declined largely as a result of growth concerns stemming from the Evergrande debt drama. Broadly speaking, cyclical sectors, those most sensitive to changes in economic growth, lagged more defensive sectors in the third quarter.

Sector Performance – 3rd Quarter

Sector Performance

Internationally, foreign markets declined in the third quarter. Emerging markets dropped sharply, initially on concerns that rising COVID-19 cases would derail the global recovery, but late in the quarter, emerging markets fell even further on Chinese growth worries that stemmed from the Evergrande debt issues. Foreign developed markets, meanwhile, declined modestly during the final few weeks of the quarter on general global growth concerns combined with potentially higher global interest rates.  Commodities posted strong gains for the fourth quarter in a row and again outperformed the S&P 500 over the past three months. Major commodity indices were led higher by a late-quarter rally in oil prices as members of “OPEC+” maintained a historically high compliance rate to self-imposed production targets. Additionally, gold posted a small loss in the third quarter as a firming dollar and rising interest rates helped offset still stubbornly elevated inflation metrics.

Fixed Income Markets

Switching to fixed income markets, most bond classes were little changed in the third quarter. The majority of bond indices were solidly higher through mid-September as investors rotated to safety following the rise in COVID-19 cases in July and August. However, in late September, the Fed confirmed tapering of Quantitative Easing will begin this year. That, combined with still-high inflation statistics, weighed on fixed income markets during the final few days of the third quarter.

In a more detailed view, longer-duration bonds and shorter duration bonds had very similar returns in the third quarter. For most of the quarter, longer-term bonds outperformed shorter term bonds on the growing expectation that the Fed would begin to taper QE late in 2021, and that interest rates would start to rise in late 2022. But the late-quarter rise in yields resulted in a moderate drop in longer-dated bonds. In the corporate debt markets, higher-yielding, lower-quality bonds outperformed investment-grade bonds thanks to the late quarter drop in investment-grade following the rise in global bond yields.

Energy Sector

Performance within the Energy sector has been impressive of late.  At the end of the third quarter, the sector was up 42% on a year to date basis and over 82% for the previous 12 months (as represented by the Energy Select Sector SPDR ETF: XLE).  But the other side of that is consumers are beginning to feel the impact of higher energy prices not only here but abroad as well.  In Europe, the cost of electricity is soaring. As economic recovery and re-openings move forward, prices began to rise, but have spiked over the past few weeks. Since the start of September, wholesale power prices in Germany have risen 36% and 48% in France. 

In Europe and Asia, natural gas prices have shot up by more than 360% in less than one year. Production dropped off during the pandemic and as nations begin to lift restrictions, demand for energy has risen.  With the dependency on coal being phased out, many countries have turned to natural gas as a transitional bridge before green alternatives are fully rolled out.  (Great Britain generates nearly half of its electricity from burning natural gas.) 

 Global Natural Gas Prices

Natural Gas

Earlier this year, an unusually cold European winter and a summer heatwave led to depleted supplies, leaving many countries unable to restock. In addition, Europe has been decreasing their production of natural gas and inventories at storage facilities reached historical lows.  More than two-thirds of the UK’s demand for natural gas had to be made up from imports.  Replenishing those reserves from outside sources proved difficult as the freeze in Texas this year drove domestic demand up, reducing export availability.  In addition, Hurricane Ida forced nearly all of the Gulf of Mexico’s gas output facilities offline.  Countries are trying to outbid one another for energy as exporters such as Russia have reduced exports due to bottlenecks, calmer weather in the North Sea reduced output from wind turbines and Europe’s aging nuclear plants continue to be plague stressed markets. Together, natural gas and coal still supply more than 35% of the European Union’s total production, with gas representing over a fifth.

East Asian countries have joined Europe in the quest for energy as their economies struggle to get back to normal.  Coal inventories in China (the leading fuel source for generating electricity), hit a 10-year low in August.  As coal prices have been rising and supplies are limited, power shortages are occurring in China.  Several provinces are rationing electricity and rolling blackouts are causing some factory shutdowns, compounding the current supply side issues. Geopolitical tensions with Australia have put a strain on coal imports, broadening demand for natural gas and contributing to rising prices.

Most consumers pay little attention to the market price of natural gas. It is different than oil, where a snap decision from OPEC or a dramatic price increase is felt rather quickly at the pump. This winter, global economies just may become more aware of how much they depend on natural gas.  Households will face expensive power bills and some economies that cannot afford the higher fuel costs could simply come to a standstill.

West Texas Inter Crude Prices

West Texas Crude Prices

As for here in the U.S, consumers will also feel the effects of rising heating and electricity costs this winter. Even though gas prices have been notably lower in the U.S. than in Europe and Asia, they are trading near the highest level since 2014 and inventories are running below their five-year average.  It is estimated that both oil and natural gas prices have doubled over the last 12 months and gas at the pumps is up approximately 50% on average.  While the recent spike in energy costs may prove temporary, a longer period of higher costs or further rise in oil to over $100 per barrel could trigger a slowdown in global economic growth.  But the difference this time is oil is not the source of the issues, but is having to fill in the gaps and make up for the supply/demand imbalances of natural gas, coal and renewables.  Oil companies are not increasing production which has been more constrained due to the push for more renewables.  Economists say the rise in energy prices would have to be sharper and much more prolonged to cause a recession or turn U.S. growth negative even though energy costs represent a considerable portion of consumers’ budgets.  In August, approximately 7% of consumer spending went toward energy, according to the Labor Department.  We are all very aware of the immediate impact higher energy costs have on inflationary pressures and particularly in the midst of the current surge in demand and supply backlogs for consumer goods. Producers using all modes of transportation to get their products to store shelves are experiencing an escalation in the cost of doing business.  Fewer planes, ships, trucks and workers are being joined by higher fuel costs. It remains to be seen how severely this impacts company profit margins.  Currently, even though the share of energy costs is the highest in nearly a decade, so far in 2021 it is 5.2% of GDP, on an annual basis, which does not signal a critical level.

Tax Proposals

We continue to monitor the Biden Administrations tax proposals.  While this remains a very fluid situation and changes and adjustments are taking place, as things go, it is still early the process.  The Senate has already approved $550 billion in new infrastructure spending which awaits action by the House.  The second bill which is larger and more controversial (Build Back Better Act) and is unlikely to get Republican support.  Recently, the House Ways and Means Committee approved tax proposals recommendations that are similar to the Biden proposals, but not as aggressive in some areas.  For example, Ways and Means proposes increasing the corporate tax rate to 26.5% vs Biden’s 28%.  While Biden is calling for the capital gains rate to increase to 39.6% (or the proposed top individual tax rate).  Some higher earnings pay a 3.8% tax on investment income, bringing their total to 43.4%.  The proposal makes no change to capital gains at death rules or “step up” of basis at death which has been highly controversial.  The House recommendation is for the capital gains tax to go from 20% to 25% on those with incomes over $400,000.  The new tax would apply to any gains realized after September 13, 2021.  There is also a proposal to impose a surtax of 3% on individuals with incomes in excess of $5 million.  Similarity in the House Ways and Means and the Biden proposals revolve around reverting the top individual rate to 39.6% in 2022 from the current 37%. 

It is possible the $3.5 trillion package will be reduced and so will tax the increases.  It is still too early to predict.  Though tax planning is an important strategy, it should not fully drive your longer term investment goals and objectives.  We monitor potential changes to the tax laws and how they will impact our clients, but always recommend you consult a tax professional to discuss your specific situation.


Elizabeth D. Swartz
Brian T. Moore
October 2021



  1. S&P 500 Performance –
    Federal Reserve Economic Data:  Year to date through September 30, 2021.
  2. Sector Performance -
    Morningstar:  S&P 500 Sector Index.
  3. Natural Gas Prices -
    Federal Reserve Economic Data:  Global price of natural gas EU, US dollar/million metric British ternmal units.
  4. West Texas Intermediate Crude Oil Prices -
    Federal Reserve Economic Data:  Price per barril, weekly.


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