Third quarter, 2017 saw stocks rise amid a brighter outlook for the global economy and better-than-expected corporate earnings. Several key market indexes reached record highs during the quarter, despite increasing tensions with North Korea and a historically harsh hurricane season. 3Q also saw European stocks and emerging markets outpace U.S. equities.
Economically sensitive stocks generally provided stronger returns than the defensive sectors with the information technology, energy and materials stocks leading the way. Financial stocks also advanced on expectations for rising global interest rates. The consumer staples sector fell, weighed down by a sharp decline in the shares of tobacco companies.
Global Markets: Optimistic
In Q2 and Q3 we predicted that developed international markets were shaping up to be leading the way for performance in 2017. At a total return of 19.96% YTD, while it was topped slightly by the NASDAQ , investors who turned up their exposure to International have been well rewarded. Unemployment is continuing to trend downward in Europe, inflation is strengthening in developed markets, while it is decreasing in emerging markets. Manufacturing demand has heated up all around the world, which should support healthy earnings in the near term. However risks persist with terrorist activities, and political disruption. While the markets are strengthening, investors should beware of geopolitical events that could temporarily disrupt performance.
U.S. Economy – Good
The US Economy has persisted in posting strong results, especially in the area of unemployment. Even after recent devastating natural disasters, jobless claims have held at record lows. Rates remain low, and inflation has held at very low levels. The biggest risk to the economy appears to be political risk. If Washington is unable to produce the promised corporate tax cuts, or if healthcare is derailed the economy may suffer.
Inflation – Good
Inflation has held at very low levels. While this is great for the consumer, whose dollar stretches farther, it is not great for a normalization of interest rates. Ultra-low unemployment should push wage inflation up in time.
Interest Rates – Good with caution
It is expected that the Fed will fulfill their projections to raise rates at the end of the year, and then 2-3 times next year. There is a determined march at the Fed to shrink the balance sheet, and lower rates in order to regain the ability to react to negative economic conditions in the future.
U.S. Stock Market – Good with Caution
2017 has more than exceeded predictions for returns in every asset class. As we move through the 100th month in a bull market, it would be imprudent not to feel cautious about the sustainability of the types of returns the market has delivered for the last 2 years. Fundamentals are still strong and are projected not to deteriorate. However the world is expecting a pull back, which could fuel volatility if any evidence of weakness is revealed. Therefore close attention should be paid to rebalancing portfolios to maintain the proper exposure to equities.
Recent allocation changes have yielded good results in the last quarter. It is important as we see these stronger than average returns that rebalancing occurs with discipline. While we remain optimistic about what the markets can produce in the near to intermediate term, adhering to the right risk exposure reflects healthy caution.