Global markets continued their broad advance during the third quarter 2017. Thus far 2017 has been a year where all major asset classes have advanced with international equities leading the field. Could we now be at an inflection point?
The yield curve, which had actually been flattening most of 2017, has steepened recently and just notched its first quarterly gain of the year. This may be attributed to the most recent Federal Reserve Meeting which concluded September 20th and the newly released Trump Tax proposal. At the Federal Reserve meeting, The Fed indicated that it remained on track to raise short-term rates one more time this year, most likely December, and three additional times in 2018. The Fed has raised rates by a quarter percentage point four times since late 2015; most recently in June, to a range between 1% and 1.25%, after keeping near zero for seven years. Also, beginning in October, the Fed will end its practice of fully reinvesting the principal payments of maturing bonds into new bonds and instead will allow $10 billion in holdings to roll off without reinvestment. Those amounts will increase by $10 billion each quarter to a maximum of $50 billion. Low inflation is one reason the rates have not been raised at a faster rate. The Fed now hopes to achieve their expected 2% inflation target by 2019.
For example, companies have very little pricing power right now, and as you are most probably aware, the Amazon effect may have something to do with it. Amazon’s disrupting pricing and logistical power has put US and Global retailers on notice, that they are more than willing to carve into their market share and enter markets that previously were the moated domain of segmented specialty retailers.
The total return of the DJIA was 5.58% during the quarter, just over 1% higher than the S&P 500 at 4.48%. This is the DJIA’s longest streak of quarterly advances since 1997. The Russell 2000, which has lagged the larger domestic indexes thus far in 2017 was the best performing domestic market cap-weighted index during the month of September 2017, returning 6.08%.
Emerging market stocks, up 7.89% in the third quarter, are on pace for their best year since 2009. However, many investors remain skeptical and fear a downturn. International developed markets also returned 5.40% during the quarter and have now nearly returned 20% during 2017.
Oil has stabilized in the $50 range and ended the quarter at $51.67, 12.2% higher than June 30th snapping a two quarter losing streak and marking the biggest quarterly gain since the second quarter of 2016. Gains are attributable to a combination of increased global demand and somewhat lower US production as rig count declined.
Gold which began the quarter at $1,241 rallied to close at $1,281.50 up 4% for the quarter and is now 12% positive year to date.
As we begin the final quarter of the year it appears that the current market action reflects a scenario of stronger global growth, along with expectations that US tax overhaul will ultimately boost corporate profits and US borrowing. The US dollar which has been weak for most of 2017 has recently rebounded and domestic small cap stocks have caught a major bid. Financials and Industrials are again outperforming just as they did after the most recent Presidential election. Equity markets appear priced for perfection, but the current major alternative to equities is a ten year treasury still yielding just 2.33%. Currently, investors are betting on better times ahead, and taking a “risk on” approach. Failure of Congress to achieve any real reform or accomplish other stimulative measures could disappoint and may cause the most recent stretch of minimum volatility to dissipate.
CRA FINANCIAL LLC