With the September quarter wrapped up, investors can look forward to warmer weather, the looming holiday season and a traditionally buoyant period for financial markets.
Global sharemarkets have had a good year so far. The MSCI All Country World Index has returned a healthy 11.5 per cent so far this year, while the local NZX 50 index hasn't been quite as strong, adding just 1.4 per cent in 2021.
Compared with pre-pandemic levels, world shares up are up a spectacular 26.5 per cent, while the New Zealand market is 10 per cent higher.
However, it is unlikely to be plain sailing in the coming months, with some of the volatility that has emerged in recent weeks likely to persist.
September lived up to its reputation as the weakest month of the year for US shares, with the S&P 500 index falling 4.8 per cent, its first monthly decline since January and the worst performance since March 2020, at the height of the pandemic.
Several factors have weighed on markets and investor confidence lately.
Global economic growth has hit a speed bump, with momentum slowing in all the major regions, while the delta variant of Covid-19 has proved difficult to manage. This has led to fresh restrictions in many places, hampering the recovery that looked so strong a few months ago.
Chinese economic activity has slowed particularly sharply, with the troubled property giant Evergrande adding to the uncertainty. A regulatory clampdown on technology companies has created additional nervousness among investors in the world's second-largest economy.
Markets are also grappling with the prospect of higher interest rates and less stimulative policies from the world's central banks. This is something that will be firmly in the spotlight over the balance of this year, and into 2022.
Monetary policy is likely to remain accommodative for an extended period, although moves to begin reducing the level of support are upon us. This could make for a bumpier ride as investors cope with the transition.
In Australia, Europe and the UK, central banks have already begun "tapering" the level of their regular asset purchases (commonly known as quantitative easing, or QE).
The Federal Reserve in the US, which is the world's largest and most influential central bank, is expected to do the same before the end of this year.
Here in New Zealand, the Reserve Bank halted its QE programme in July, opening the door for the first rise in the Official Cash Rate (OCR) since 2014.
Financial markets expect the OCR to be around 1.50 per cent by this time next year. This would still be very low by historic standards. However, it is a big jump from the near-zero levels that have prevailed for the past 18 months.
On the bright side, markets have seen this coming and adjusted in advance. Mortgage rates have been rising since June, while longer-term bond yields have risen to the highest in two-and-a-half years. A steady diet of OCR hikes might only have a modest impact, as much of this is "in the price".
Encouragingly, seasonality is on our side at this time of year, with the December quarter a typically lucrative period for investors.
Since 1945, the final three months of the calendar year have produced an average return for the S&P 500 of 3.9 per cent, well above the 1.5 per cent average of the other three quarters.
The US market has finished the December quarter higher in 59 of those 75 years (79 per cent of the time), compared with a 62 per cent hit rate for the other three quarters of the year.
Finally, the Delta variant is receding globally, with the number of new daily cases down almost 40 per cent from the peak in late August. This should allow a gradual easing of restrictions and drive an improvement in activity.
Mark Lister is Head of Private Wealth Research at Craigs Investment Partners. The information in this article is provided for information only, is intended to be general in nature, and does not take into account your financial situation, objectives, goals, or risk tolerance. Before making any investment decision Craigs Investment Partners recommends you contact an investment adviser.