The third quarter of 2017 continued to deliver steady growth across the equity markets, consistent with the theme of low inflation and accommodating monetary policies. Quickly overcoming the brief 3% retreat for the major equity indexes in the first half of August, the bull market continued to charge ahead with new all-time highs posted almost on a daily basis. As of September 30th, all the major large cap equity indexes (e.g., Dow Jones Industrial Average, S&P 500 and Nasdaq Composite) booked double-digit advances, and the small and mid-cap indexes year-to-date returns improved dramatically; posting their best September performance since 2013.
These impressive results were backed by solid fundamentals. The second quarter earnings season followed a strong first quarter as the S&P 500 companies delivered the first double digit back-to-back quarterly growth since 2011. As we now enter the earnings season, third quarter earnings growth is anticipated to be in the high single digits and broad based, occurring in most of the economic sectors. Despite the recent hurricanes, more companies have issued positive guidance.
Internationally, the results were similar. The MSCI EAFE index grew on better economic and political news, especially in Europe, and emerging markets outperformed all other equity indexes for the quarter, mostly due to the declining value of the U.S. dollar.
Fixed income results were mixed and the Barclays Aggregate Bond Index moved slightly higher. The Treasury yield curve continued to flatten in the third quarter as it has for most of the year. Investors often worry that a flattening yield curve is a precursor to a recession, but history shows us that this is not necessarily the case, at least not immediately – back in the 1990s the spread between the 2- and the 10-Year Treasury yields narrowed for most of the decade before we finally experienced a recession.
Our domestic economy expanded faster than previously estimated in the second quarter of 2017. The unemployment rate held steady with over a million new jobs added through the end of August, and the job participation rate improved substantially. Consumer and business confidence remains strong, currently reaching the highest levels since 2001, and this confidence translates into solid hard spending data. Capital expenditures are expected to rise for the first time in three years in anticipation of the lower corporate taxes proposed by the administration.
The Federal Reserve is widely expected to enact at least four rate hikes between now and the end of 2018, although the inflation rate fell back below the Fed’s target in recent months. The Fed has also started to slowly reduce the trillions of dollars in bonds it bought to stimulate economic growth after the 2008 financial crisis. This is perceived as a sign that the monetary policy makers have enough confidence in the strength of our domestic economy.
As we enter the final three months of the year, it is time to look ahead. Historically, the last quarter witnesses a lot of action. Budget battles, hiring and firing announcements, money managers’ year-end “window dressing” and the holiday shopping season may further push the markets higher – or slow their ascent. The geopolitical uncertainties, which for the last nine months failed to affect the market, may finally weigh it down. For the first time in over a decade, the year to date yielded no daily market moves that exceeded 2% however, this period of unprecedentedly low volatility could come to an end. That said, there is enough evidence to suggest that the current leg of this outstanding bull market that emerged off of the lows of early 2016 remains intact, and the last quarter of this eventful year will not disappoint investors.
Dumont & Blake Investment Advisors, LLC
September 30, 2017