Stocks Continue Their Steady Rise
- Economic data received over the last three months reflected steady economic growth.
- Measures of consumer confidence remain strong and steady—consumer spending gains continued up until the hurricanes hit. Job growth in July and August further tightened labor markets, pushing wage growth higher and supporting consumer spending.
- U.S. stocks returned 4.5% during the third quarter, based on the S&P 500 Index (including dividends).
- Growth beat value for the third straight quarter on technology strength; even though the biggest value sector, financials, also outperformed during the quarter. Small caps outpaced large caps for the first time since the fourth quarter of 2016, as smaller, domestic companies generally stand to benefit more from potentially lower corporate tax rates.
- Commodities rebounded from second quarter weakness to gain 2.5% during the third quarter.
- Oil rallied 13% in the quarter after falling 9% during the second quarter, thanks to firming global demand, Saudi-led production caps, and slower U.S. production early on. Oil’s strength, however, did not translate over to natural gas which fell 3%.
A LOOK FORWARD
- During the fourth quarter we believe the stock market may be susceptible to event-driven risks from budget negotiations, a policy mistake by a major central bank, or geopolitical tensions. Still, with the potential for tax reform—or tax cuts—in early 2018 and a still favorable global economic and earnings environment, potential
dips may present opportunities. Our favorable intermediate-term stock market view is driven by:
- 1) improving economic growth
- 2) mid- to high-single-digit earnings gains with the potential for a boost from fiscal policy in 2018, and 3) a stable price-to-earnings ratio of 19 – 20.
- We expect the 10-year Treasury yield to end 2017 in the range of 2.25 – 2.75%, with the potential for 3%. We believe the Fed may hike rates one more time in 2017 assuming economic growth or inflation doesn’t falter. Importantly, rising interest rates, along with a potential pickup in the pace of economic growth and inflation, may limit bond market return potential.