Stocks worldwide posted another solid quarter, featuring an eleventh consecutive month of post-US presidential election gains. US stocks were up +4.5% through quarter-end, leaving price higher by +13.8% on the year (VTI ETF Index Proxy*), and volatility at quarter-century lows. Aggregate Bonds also performed well in spite of increasingly hawkish Federal Reserve-speak, up +0.7% last quarter for an annual gain of +3.1% (AGG*). Finally, although Commodities recorded a strong snap-back rally of +6.6% on a hurricane damage induced boost, they are still down on the year by about -2.8% (DBC*).
Equities have remained resilient in the face of significant headline risks over the course of the summer, including domestic political uncertainty, a rising existential threat posed by North Korea’s nuclear ambitions, and record-breaking hurricanes Harvey, Matthew, Irma and Jose. While these events precipitated short-lived spikes in market volatility, each ultimately settled back down. It helped that the US government was able to delay federal budget negotiations until December, and that tax reform proposals were announced, which could significantly reduce corporate tax rates and simplify personal filings.
On the economic front, US reports continue to indicate a slow but steady growth scenario. Final second quarter Gross Domestic Product (GDP) was adjusted upward to +3.1% (Source: Bureau of Economic Analysis, “National Income and Product Accounts” Press Release, 9/28/17), the fastest pace in two years. That said, it is estimated that the recent hurricane damage could reduce third quarter growth by approximately -0.4% to -0.8% (Source: CNBC, “Hurricanes Irma, Harvey Will Have a Significant Negative Impact on Third-Quarter GDP Growth”, 9/13/17). Indeed, the October non-farm payroll report at -33,000 recently demonstrated the first sign of this, posting the first loss in seven years (Source: Bureau of Labor Statistics).
All of these risks are set against the backdrop of a long-in-the-tooth bull market and a historically elevated stock market valuation. This does not mean that either a correction or a return to volatility is imminent. However, it does potentially lay the ground work for either event as market sensitivity to future growth and inflation estimates becomes increasingly acute. We have thus been paying especially close attention to both technical and fundamental facets as we head into the final quarter of 2017. Meanwhile, it remains “steady as she goes” for this resilient and long-lived bull market.
*ETF Index Proxy, dividend-adjusted time series from Commodity Systems, Inc. as of September 30, 2017, including: SPY – SPDR S&P 500 ETF; AGG – iShares Core US Aggregate Bond ETF; and, DBC – PowerShares DB Commodity Tracking ETF.
OUR TEAM
Jeff Pietsch CFA, Managing Director
2017 Third-Quarter Wrap
Stocks worldwide posted another solid quarter, featuring an eleventh consecutive month of post-US presidential election gains. US stocks were up +4.5% through quarter-end, leaving price higher by +13.8% on the year (VTI ETF Index Proxy*), and volatility at quarter-century lows. Aggregate Bonds also performed well in spite of increasingly hawkish Federal Reserve-speak, up +0.7% last quarter for an annual gain of +3.1% (AGG*). Finally, although Commodities recorded a strong snap-back rally of +6.6% on a hurricane damage induced boost, they are still down on the year by about -2.8% (DBC*).
Equities have remained resilient in the face of significant headline risks over the course of the summer, including domestic political uncertainty, a rising existential threat posed by North Korea’s nuclear ambitions, and record-breaking hurricanes Harvey, Matthew, Irma and Jose. While these events precipitated short-lived spikes in market volatility, each ultimately settled back down. It helped that the US government was able to delay federal budget negotiations until December, and that tax reform proposals were announced, which could significantly reduce corporate tax rates and simplify personal filings.
On the economic front, US reports continue to indicate a slow but steady growth scenario. Final second quarter Gross Domestic Product (GDP) was adjusted upward to +3.1% (Source: Bureau of Economic Analysis, “National Income and Product Accounts” Press Release, 9/28/17), the fastest pace in two years. That said, it is estimated that the recent hurricane damage could reduce third quarter growth by approximately -0.4% to -0.8% (Source: CNBC, “Hurricanes Irma, Harvey Will Have a Significant Negative Impact on Third-Quarter GDP Growth”, 9/13/17). Indeed, the October non-farm payroll report at -33,000 recently demonstrated the first sign of this, posting the first loss in seven years (Source: Bureau of Labor Statistics).
All of these risks are set against the backdrop of a long-in-the-tooth bull market and a historically elevated stock market valuation. This does not mean that either a correction or a return to volatility is imminent. However, it does potentially lay the ground work for either event as market sensitivity to future growth and inflation estimates becomes increasingly acute. We have thus been paying especially close attention to both technical and fundamental facets as we head into the final quarter of 2017. Meanwhile, it remains “steady as she goes” for this resilient and long-lived bull market.
*ETF Index Proxy, dividend-adjusted time series from Commodity Systems, Inc. as of September 30, 2017, including: SPY – SPDR S&P 500 ETF; AGG – iShares Core US Aggregate Bond ETF; and, DBC – PowerShares DB Commodity Tracking ETF.
Jeff Pietsch, CFA
Managing Director
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