Q3 2017 Economic and Market Perspective

Stocks Hit New Highs:
Global equity markets posted gains during the third quarter of 2017, with major U.S. market indices hitting a series of new highs.    The U.S. enjoyed a goldilocks like environment last quarter- not too hot, not to cold (characterized by continued low unemployment and inflation, reasonably strong economic growth, and relatively healthy corporate profits).   Positive business and investor sentiment also helped support stocks and push them gradually higher over the quarter.

Overseas equities thrived on continued accommodative monetary policy by central banks, relatively attractive valuations, and growth prospects in foreign markets. For the quarter, the S&P 500 was up 4% but once again international equity markets did even better- The S&P Global Ex-US BMI index was up 5.6% for the quarter. Strong performance from International stocks has been a major trend this year and the third quarter was, ironically, the third consecutive quarter that international equities as a group outperformed the U.S. broad based market.

Emerging markets continued a solid year gaining 7.7% during the most recent quarter.   Developed international markets also bested the U.S. with particularly strong results from European markets like France and Germany (both up 4.1%).  One key driver of international and emerging stocks’ returns during the quarter was a weak U.S. Dollar, the greenback fell 2.8%. This was caused by lower than expected interest rates in the U.S. and better than anticipated economic and political conditions in Europe.   A weak dollar, relative to other currencies, provides a tailwind to U.S investors in foreign stocks by making those investments worth more in dollar terms.  In fact, much of the excess returns from developed international markets during the quarter were due to the falling dollar (a weak dollar makes it less expensive for overseas companies to pay down any dollar-denominated debt they may owe).

Growth and Small-Cap stocks lead the U.S. returns:
As they did during the first half of the year, growth stocks outperformed value stock in the third quarter, but by a smaller margin than seen in previous quarters.    Growth stock gains were fueled once again by the technology sector, which investors favored yet again due to its attractive revenue and earnings growth prospects.   The S&P 500 information technology index gained 8.3% for the quarter off the heels of investors’ interest in robotics and artificial intelligence. It should be noted that in the financial services space (a major value orientated sector) it saw gains late in the quarter after the Federal Reserve Board announced it would reduce its balance sheet.  That announcement drove rates on short term fixed income securities higher- a move that generally benefits banks’ profits

Market Volatility Remains at Historically Low levels:
The low volatility environment that has characterized the equity markets during most of 2017 was fully evident during the third quarter, as stock indices rarely swung by 1% or more during any trading session. This could be viewed as an abnormality given the concerns about geopolitical tensions between the U.S. and North Korea and issues involving global security.   The CBOE volatility index (VIX) which measures expected future volatility in the S&P 500 and is often referred to as the market’s “fear gauge” hit its lowest level of 2017 during the third quarter.

Bond Yields Rise:
In the fixed income markets, bond yields finished the quarter higher than where they started.    The yield on the 10 year Treasury note ended the quarter at 2.328%, up from 2.302%, and the 30 year Treasury bond yield rose from 2.835% to 2.859%.   Treasury bond prices which move in the opposite direction of yields fell in that raising rate environment.

Looking Ahead:
Clearly, the third quarter was a good time to be invested and looking ahead, many of the drivers that have pushed stock prices higher this year remain in place. New highs beget more new highs historically; the many recent new highs in major equity benchmarks during the third quarter suggest (but do not guarantee, of course) that the markets could continue to climb higher simply due to momentum and inflows of cash into the equity universe.   From a macro level the economy is healthy, jobless claims (unemployment) remain at historically low levels while GDP is healthy and was revised higher than initially reported last quarter.    There has been a lot of talk about a stock market bubble, and I’ll share a few thoughts on that topic. One major criticism of the economic recovery from the housing crisis and fallout is that it’s been slower and weaker than past recoveries.  This slow growth has helped reduce grossly overinflated prices in various asset classes, which was common in recent, more robust and quick economic recoveries.   It does not mean certain areas, sectors, or spaces may experience or be in an asset bubble. If that is an area of concern for you, please contact the office and we can look at your holdings from a micro level and discuss.

If you have any questions on this update or your investments, please do not hesitate to reach out at any time.

All statistical data provided by Bloomberg (https://www.bloomberg.com/)

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