We continue to see back and forth trade posturing between the United States and foreign trading partners and expect this to continue throughout the remainder of 2018. With that being said, the U.S. and Canada reached a deal after a lengthy negotiation. The new “United States-Mexico-Canada Agreement” (USMCA) is a reworking of NAFTA and hopes to bring more jobs into the U.S. Despite this trade uncertainty in quarter 3, the American economy advanced. In the 3rd quarter of 2018, U.S. stocks once again performed well seeing momentum from U.S. growth and strong earnings reports. The trade concerns and other political uncertainty has continued to put pressure on international markets. Emerging market stocks slid slightly while Europe continues to struggle as the United Kingdom’s negotiations to “Brexit” from the European Union leads to continued uncertainty for the region. Fixed income markets remain a challenging place to invest as interest rates continue to rise.
Large U.S. companies continued their outperformance as the S&P 500 returned 7.2% for the 3rd quarter. The Dow Jones Industrial Average rose by 9%. Despite these returns, volatility declined resulting in a quarter where the S&P 500 did not have a single trading day where it closed with a 1% move up or down. Small cap stocks trailed larger companies but still posted a 3.2% return for the quarter. International stocks in developed markets declined (0.8%) for the quarter, lagging the United States. As discussed above, emerging markets also retreated with a negative (2%) return for the quarter. Foreign trade will likely remain a focus of the Trump administration into 2019 with further volatility in international markets also likely to continue.
Bond and Credit Markets
On September 26th, for the third time this year, policy makers voted to unanimously raise the federal funds rate 25 basis points to a range of 2.00% to 2.25%. It is expected that the Fed will look to raise rates once more before the end of 2018. While the President negatively reacts to these rate hikes, they are still considered historically low and a sign of a strong economy. Fed Chairman Jerome Powell stated that “this gradual return to normal is helping to sustain this strong economy for the longer run benefit of all Americans.” Most researchers believe that even with continued rate hikes, they are not expected to slow down a resilient economy. From an investment standpoint, these rate hikes pose challenges to bondholders as bond prices decline when interest rates rise. The broad based U.S. Aggregate Bond Index declined slightly by (0.2%). For the year the index is off by (1.6%). Municipal bonds rose 0.3% for the quarter. The yield curve remains very flat with a 38 basis point spread between the 2-year and 30-year U.S. Treasury bond.
Commodities declined for the quarter posting the longest losing streak in more than 3 years. The Bloomberg Commodity Index fell (2.5%) amid concerns over the Chinese demand outlook and continued trade friction. Gold posted its 6th straight decline in September while oil and natural gas prices continue to climb. The U.S. Dollar is a significant factor when it comes to commodity prices. The Dollar Index moved higher by 0.41% for the quarter and is now higher by 3.17% for the year.
Perspective For the Rest of the Year
The overwhelming media story for the 4th quarter is likely to be centered on the mid-term elections occurring in November. Democrats are forecast to make gains in the House while Republicans may fare better in Senate races. If Democrats are able to take control of Congress they could look to block President Trump’s policies essentially making him a lame duck president for the remainder of his term. Continued trade tension and this political uncertainty could cause the abnormally low volatility from the 3rd quarter to subside and investors should expect market fluctuation to normalize.
Year-End Tax Planning
At CRA Financial, we look to help our client’s create tax efficiencies where possible. This is done by looking at which mutual funds will be paying out capital gains distributions at the end of the year and also harvesting losses in non-qualified portfolios where appropriate. As always, we are here to help you with any questions. We look forward to continuing to service you and thank you for your trust in our team.
CRA Financial, L.L.C.