Stock markets rallied late November on news of an ostensible trade truce between the U.S. and China after the G20 meeting in Argentina, as well as Fed Chair Jerome Powell softening his tone regarding future interest rate increases. The S&P 500 was up 2.04%, bringing its year-to-date gain to just above 5%. Emerging market equities, which are often sensitive to U.S. monetary policy, surged 4.12% during the month. The Fed is still expected to raise rates at its next meeting in December, but odds for further action in 2019 have been declining.
Volatility picked back up in a big way in October, with most major stock markets experiencing between 5 – 10% declines. There wasn’t any one reason investors could point to, but a combination of rising interest rates, potentially escalating trade tensions with China, and the upcoming midterm elections were enough to cause a wave of selling. Yet the underlying economy and corporate fundamentals, especially in the U.S., appear to be on solid footing. Third quarter GDP came in at a 3.5% annualized rate, and yearly S&P 500 earnings growth is tracking at nearly 25%.
QUARTERLY MARKET COMMENTARY : Third Quarter 2018
Last quarter, we noted that a Google Trends search for the term “trade war” hit a value of 100 in early July, which denotes peak popularity according to the firm’s model, reflective of what was arguably investors’ top concern over the first half of 2018. But how did stocks respond as fears of an impending trade war reached their peak? By rallying nearly 8% over the ensuing three months, hitting a new all-time high in the process. So, despite a seemingly daily deluge of headlines warning of imminent economic peril, investors who stayed the course were well rewarded. Markets have a funny way of doing that. And while the final resolution of various trade negotiations around the world are uncertain, the global economy remains on solid footing and corporate earnings continue to impress.
You may have missed, it given all the headlines surrounding various political distractions across the globe, but the third quarter turned out quite nicely for stock markets. The S&P 500 gained an impressive 7.71% and reached a new all-time high. International equities also posted positive performance, with the MSCI EAFE up 1.35%. Fixed income markets were relatively stable, as investors largely anticipated the Federal Reserve’s late September decision to raise its key interest rate for a third time this year.
Sell in May and go away? Not so in 2018, as U.S. stock markets have rallied strongly over the past 3 months. The S&P 500 gained 7.10% over that time period, recouping its losses from early in the year and even hitting a new all-time high. International and emerging markets have not fared as well, due to ongoing trade disputes and currency crises in Turkey and Argentina. Both the MSCI EAFE and MSCI Emerging Markets are roughly flat since May. Thanks to ongoing economic strength in the U.S., the Federal Reserve is all but certain to raise interest rates at its upcoming September meeting.
It was a strong first half for the U.S. economy with 2nd quarter GDP coming in at a 4.1% annual rate. Solid growth coupled with the boost from tax legislation are supporting another standout earnings season. Second quarter profits for large cap companies are expected to be up more than 20%. Stellar corporate performance has supported the stock market’s recent advance despite continued worries about trade policy and rising interest rates. In fact, the S&P 500 rose 3.72% last month and is just shy of January’s all-time high. International markets were better in July with the MSCI EAFE and MSCI Emerging Markets up 2.46% and 2.20%, respectively.
Despite continued stock market volatility and increasing risks surrounding trade policy, underlying economic growth in the U.S. looks solid. The Atlanta Federal Reserve is projecting just over 4% GDP growth for the 2nd quarter. Equities have slowly moved higher since their correction in February, with the S&P 500 now up a modest 2.65% year-to-date. Small cap stocks have been the standout though, rising 7.66% over the first half of 2018. The Federal Reserve raised its key federal funds rate again after its June meeting, and is projecting one to two more increases for the duration of the year.
After bouncing around between its 50 and 200-day moving average for about six weeks, the S&P 500 finally broke out of that trading range in early May. Momentum continued throughout the month with large cap stocks gaining 2.41%. Down the cap scale fared even better, with small cap equities rising an impressive 6.07%! A firming U.S. dollar and less sensitivity to global trade are often cited as catalysts for recent small stock outperformance. The aforementioned dollar strength, however, was a headwind for foreign assets. International and emerging stocks fell 2.25% and 3.54%, respectively, in May.
QUARTERLY MARKET COMMENTARY : First Quarter 2018
John Pierpont Morgan, best known today from the bank that bears his name, was one of the most important financiers of the late nineteenth and early twentieth centuries. Due to his influence, he was regularly asked for his opinion on what was in store for the stock market. Short-term market movements are notoriously difficult to predict, so Mr. Morgan resorted to a pithy yet proper response – “It will fluctuate.” True indeed, especially for the 1st quarter of this year, which has been characterized by quite a bit of fluctuation. Already there have been 23 days in which the S&P 500 moved greater than one percent, compared to just eight such days in all of 2017. Also, stocks experienced their first 10 percent correction since February 2016. On average, declines of that magnitude happen nearly once a year. It has been an uncomfortable start to be sure, but given that 2017 set records for its lack of volatility, 2018’s market action may be better described as a return to normalcy, rather than an omen of something more sinister to come. Volatile markets typically don’t turn into prolonged bear markets absent material economic weakness, which we don’t believe is currently the case.
It is safe to say the market was still in a corrective phase last month. Whether it was renewed fears surrounding future trade policy, or investor anxiety about technology darlings Facebook, Amazon, and Tesla, stocks continued to experience elevated levels of volatility. As March drew to a close, the S&P 500 had declined 2.54%, and the technology-heavy NASDAQ was off 2.79%. Somewhat surprisingly, the small stocks in the Russell 2000 held up well, actually gaining 1.29%. New Federal Reserve Chair Jerome Powell hosted his first meeting, which went largely as expected. The federal funds rate was increased another quarter percentage point, with a forecast of two to three more hikes through year-end.