The third quarter of 2018 concluded with strong gains for the U.S. stock market, as the S&P 500 set a new all-time high and broke the record for the longest bull market in American history. Despite rumblings in the market over global trade disputes and rising interest rates, the domestic large cap benchmark was up 7.7%1 for the quarter and has now posted six consecutive months of positive returns. This once again reinforces our belief that it is important to stay the course with investing, rather than buy into market timing trends, such as the old investment adage “Sell in May and Go Away.” Internationally, equity markets were mixed for the quarter, as the benchmark was up 1.4%1 and the emerging markets were down 1.1%1. The fixed income benchmark was flat for the quarter with the Federal Reserve following through on their widely anticipated rate hike of 0.25%. Evidently, the economy needs less medicine from the Fed, which is good news!
Entering the final stage of the year, many of the risks we’ve been tracking – trade disputes, rising interest rates, and midterm elections - remain in play. The once threatened tariffs against China have now become a reality, as the Trump administration enacted 10% tariffs on $200 billion worth of Chinese goods and says that they could increase to 25% at the end of the year. Additionally, the Federal Reserve is expected to continue to raise interest rates to help moderate the strong U.S. economy. We’ve observed the 10-year Treasury yield reach its highest level since 2011 at over 3.2%2, which could impact corporate profits as financing costs trend upward. Finally, midterm elections are quickly approaching in the United States drawing the question of what the impact would be should Congress split or switch hands altogether. While there isn’t a strong long-term correlation between politics and investment returns, the added level of uncertainty could lead to short-term volatility in the stock market.
Despite the risks mentioned above, steady economic growth and strong corporate earnings support the belief that the record setting bull market can press on. After raising rates in September, Federal Reserve Chairman Jerome Powell’s outlook on the economy was “remarkably positive”, due to the low unemployment and modest inflation levels. In addition, consumer confidence remains high in America and real GDP is estimated to grow at 2.9%3 for the year. While this growth rate may slow in the coming quarters, there doesn't appear to be substantial risk of a deep recession in the near-term. However, as experiences teaches, recessions are a matter of “when and how severe” not “if”. When looking at corporate earnings in the United States, not only have we seen support from the new tax laws, but also significant revenue growth emanating from a strong demand environment. American companies are expected to report year-over-year earnings growth upwards of 20%4 for the third quarter. Ultimately, we remain optimistic that the slowly unfolding 10-year bull market will continue, but recognize there are risks present that create a wide array of possible outcomes for the global equity markets. During times of uncertainty, we believe it is extremely important to have a well-diversified portfolio that is constructed with consideration to your time horizon and goals.
2 Wall Street Journal
3 International Monetary Fund
4 Thomson Reuters