Stocks rebounded last quarter - at least here in the U.S. Trade war fears drove up the value of the dollar on the idea that tariffs would lower America’s trade deficit, which would mean fewer (and therefore more valuable) dollars in the world for commercial purposes.ii
CSFC Market Commentaries
The stock market’s long quarterly winning streak ended in the first quarter, but the loss was less than one percent. Probably more significant than the market’s loss in the quarter was the return of volatility – something we hardly saw at all in 2017.
There is really nothing negative one can say about 2017 in terms of the stock market. Returns were great almost anywhere one invested.
The stock rally continued into summer as the S&P 500 tacked on 4.48% in the third quarter.1 That brings the year-to-date gain to just over 14%. There is an increasing sense of inevitability about the market going up, which on one hand brings more money into the market and on the other hand creates the complacency about risk that usually leads to trouble.
U.S. stocks rose for the seventh consecutive quarter. The S&P 500 stock index added another 3.09%, bringing its year-to-date gain up to 9.34%. Mid and small cap stocks lagged large caps again this past quarter, rising just 1.97% and 1.71% respectively.
The Federal Reserve raised interest rates by 0.25% last week, bringing the Federal Funds Rate target to 1.00%-1.25%. This was expected, so the impact on stock and bond prices was minimal. The more important news was the weak retail sales and consumer price inflation reports. Those reports suggest that the economy might not be performing as well as stock prices have forecast. This makes stocks increasingly vulnerable to a decline. At the same time, European economies have been performing much better than was expected earlier in the year. As a result, we are seeing fund flows out of U.S. stocks and into international equities (primarily Europe and emerging markets). In addition, those weak economic reports have driven bond yields to a fresh 2017 low. It seems like every year experts predict rising rates (and they certainly did in 2017), but in fact interest rates keep falling. It is this continued decline in interest rates that have supported stock prices over the past several years, not earnings growth. In fact, subtract the effect of stock buybacks on earnings per share and earnings have been fairly flat over the past four years.
Stocks gained a little over 6% last quarter while bonds rose 0.82%. Stocks continued the momentum from late 2016 as corporate profit expectations remained high, while bonds benefitted from the idea that the economy would not grow at an inflationary pace.
The stock market rallied to new highs last quarter. Investors evidently shook off the concerns they had in the weeks leading up to the election and concluded that proposed lower corporate tax rates and reduced regulation were good reasons to be bullish. Investors were quite selective, however.
Stocks performed well in the third quarter, for the most part. The S&P 500 gained 3.88% with dividends included, its best quarter since the final quarter of 2015.
The month of July was extremely kind to investors worldwide. This was undeserved, in our opinion, given Brexit, a surprisingly weak second quarter GDP report, the sixth consecutive quarter of earnings declines in the US, an upcoming election in which there will likely be considerable unhappiness no matter who wins, terrorist attacks in Europe, and the turmoil in Turkey. The US stock market posted a 3.65% gain last month, but that was bettered by a 4.16% gain for the world‐ex US.1 See Chart 1. It is as if a fever gripped investors that compelled them to buy bonds before yields fell to 0% and stocks before the Dow hit 20,000. I have a very unscientific contrarian indicator that I use to gauge market sentiment that I call the “right margin indicator”. It refers to the right margin on the internet page where I get some of my market information. It’s generally filled with fear mongering ads designed to prey on investor emotions. During the Dow run up from under 16,000 back in February, every single crank on the right margin was forecasting a stock drop of 50% or more. Now it’s filled with ads predicting Dow 50,000. As a contrarian investor seeing those ads gives me pause.