Third Quarter Update.
The markets continued their rally through the third quarter with the US indices sitting at or near all-time highs. Historically, September is the worst month of the year, but fortunately the markets weathered the month as volatility remained low and the markets trended higher.
The trend upward was led by international equities, especially emerging markets. Improving global economic conditions, strong earnings, and a weaker U.S. dollar contributed to much of the international gains. Non-U.S. markets proved to be further ahead economically than expert’s forecasts. Emerging markets outperformed in Q3, up 8%, leading the global stock markets. In October, we could see international stocks hit new all-time highs, the first time since its peak in 2014. We believe this rally in the international markets will continue as Europe and other major economies recover and fuel further global economic growth.
U.S. equities were not as strong as their international counterparts, but still the S&P 500 pushed 4.5% higher in Q3. The S&P 500 has provided eight consecutive quarters of positive gains. We believe strong corporate earnings and positive economic growth are the major contributors to the U.S. rally. Although we foresee brief pullbacks and periods of heightened volatility, especially in specific sectors, we expect positive returns for the next couple of quarters. The domestic markets will continue to drift higher as a result of the tightening labor markets, improving global economy, and potentially, tax reform.
As fundamental economic indicators improve, it solidifies the appreciation of the capital markets. Consumer sentiment remains high as unemployment continues to trend lower and inflation remains low. The recent devastating storms will likely increase spending in Q4, especially in the retail sector as residents and businesses begin to rebuild. Although the hurricanes may negatively impact other sectors of the market, we believe the upcoming earnings season will have a positive impact on the stock market.
Oil has had a rocky year and energy has been the worst performing sector until recently when oil rallied towards the end of the third quarter. The improving international markets are increasing demand and commodity markets are slowly stabilizing the supply and demand balance. Higher commodity prices should be expected for the intermediate-term, causing an increase in global GDP growth - a positive sign for further improvement in global economies.
Although there is concern that the political divide will make it more difficult to pass policy changes, we foresee some type of tax reform to take place this year. In addition, we believe an infrastructure bill remains on the horizon for 2018. We expect that both bills will have a positive impact and stimulate the U.S. economy.
The markets continue to remain resilient through the heightened geopolitical concerns in the third quarter. The problems with North Korea and rhetoric from Kim Jong-un remain a concern, but the markets thus far have felt little impact. In addition, President Trump’s strong communication and impulsive tweets remain an issue and seem to cause further divide in our country. We continue to monitor these issues and the risks associated with these concerns.
As always, please don’t hesitate to reach out to us if you have any questions.