THE ECONOMY CONTINUED ITS SLOW, LOW-INFLATIONARY EXPANSION AND THE EQUITY MARKETS CONTINUED TO GAIN GROUND. Real Gross Domestic Product (GDP) expanded by an estimated 2.5 percent and inflation hovered around 2 percent. We are now more than 100 months into the current period of economic expansion, the third longest on record. Corporate earnings grew by an estimated 2.8 percent, the fifth sequential quarter with revenue and earnings growth.
Looking at stocks, the broad U.S. markets (Russell 3000 Index) gained 4.57 percent in the third quarter, now up more than 14 percent year to date. Reversing a year-long trend, in the third quarter, small cap outperformed large cap stocks and value outperformed growth stocks.
As nice as the returns have been domestically, international stocks this year have performed even better. Stocks of Internationally Developed Countries were up 5.62 percent in the quarter. Emerging market stocks continued their year-long leadership position, up 7.89 percent for the quarter.
Looking over the other investment categories, real estate, as measured by the U.S. REIT index, posted a modest gain during the year’s third quarter, now up 1.75 percent for the year. The Bloomberg Commodity Index gained 2.52 percent for the quarter, but remains down (negative) for the year.
Interest rates increased across the U.S. fixed income market for the quarter. The yield on the 10-year Treasury note increased by 2 bps to 2.33 percent. The 30-year Treasury bond yield increased by 2 bps to finish at 2.86 percent. In terms of total returns, short-term corporate bonds gained 0.59 percent, and intermediate-term corporates gained 1.05 percent.
One might envision that the frustrations around stifled government policy (failed attempts to repeal the Affordable Care Act) would greatly concern investors. Uncertain resolution in the ongoing conflict with North Korea also looms. In addition, stock valuations are stretched with the S&P 500 trading over 22 earnings, putting it in the top 20 percent of market multiples over the last 50 years. Yet the stock markets continue to strongly perform.
LOOKING FORWARD, we believe that the slow growth, low inflation trajectory will continue a while longer. As a result, in the near term, the Federal Reserve should be able to maintain a very measured pace to interest rate increases.
In addition, if you look past the headlines, the underlying fundamentals of our economy are still remarkably solid. Corporations continue to report better-than-expected earnings this season, which means that American business is still on sound footing. Unemployment continues to trend slowly downward and wages slowly upward. The economy as a whole grew at a 3.1 percent annualized rate in the second quarter, which is at least a percentage point higher than the recent averages and marks the fastest quarterly growth in two years. If a new business-friendly tax package gets passed in Congress, as is currently being promoted, one could expect to see business growth continue.
Predicting future events correctly, or how the market will react to future events, is a difficult exercise. It is important to understand however, that market volatility is part of investing. This month we crossed over the 10-year anniversary of when the “Great Recession” began in October 2007 and the markets dropped by more than half during an 18-month period. Being a decade removed from the crisis may make it easier to take the past in stride.
Attached is an article from Dimensional Funds titled “Lessons for the Next Crisis” outlining how those who had an investment plan and were able to stick with it weathered the crisis well. This is why we find it so critical to have regular and ongoing discussions regarding current and intermediate cash flow needs, investment goals and risk tolerances as part of your overall financial plan.
Please click here to read the complete TFA Quarter in Review | 3Q 2017.