U.S. stock markets had a great third quarter, with nearly every domestic index posting sizable gains. By the end of August most U.S. indices were at all-time highs. Foreign markets, on the other hand, as well as most of the bond market just treaded water for the quarter, more or less, and the majority of those indices were still sitting on year-to-date losses.
Corporate earnings here have certainly benefited from last year's tax cuts, which have helped push already-lofty profit margins to fresh highs. According to JP Morgan's chief market strategist, U.S. earnings are also benefiting from accelerated spending as corporations try to build some inventory ahead of escalating tariffs. But market gains, which were broad last year, have narrowed this year.
For example, while third quarter performance translated into an above-average year-to-date gain for the broad U.S. benchmarks, there is a very wide disparity between the performance of "growth" investments (led primarily by technology companies, many of which pay little, if any, dividends) and "value" investments (largely made up of stodgy, "old-economy" companies, most of which pay dividends), with the former more than doubling the returns of the latter.
Looking forward, it's a real mixed bag. On the positive side, earnings expectations in the U.S. remain high and inflation remains low, there is a potential resolution on the tariffs with Mexico and Canada, and traditional recessionary signals are not yet flashing warning signs. On the other hand, the economy is stretched, the current recovery is already one of the longest on record, tariffs on China remain in place and are set to increase significantly next year, and interest rates continue to rise, which may become a headwind to asset prices beyond just bonds at some point.
Longer term, the U.S. faces a declining workforce, which is likely to detract from future economic growth, rising budget deficits, which may eventually result in higher taxes or reduced government spending, and increasing foreign ownership of U.S. debt, which could put more pressure on the U.S. dollar as those dollars are sold and converted into local currency. But those are longer term concerns. First we have to face October, and October isn't looking so good.
So far the drop in October has wiped out nearly all of the third quarter's gains. Of course we have seen sharp pullbacks several times over the past 9 years, as recently as this past February, and the market has eventually rebounded to new highs each time, usually within short order. Given the current market sentiment and the state of the economic indicators, this pullback could very likely end the same, but as always, we will have to wait and see. Longer-term investors may continue using such pullbacks to accumulate more shares, but shorter-term investors will want to remain diversified enough to safely ride out whatever comes without being forced to sell into any longer term downturn.
The information above represents the opinion of financial advisors Travis Rus, Michael Kernan, and Chris Winther, and is not necessarily that of RJFS or Raymond James. It is not a complete summary of all available data necessary for making an investment decision, and does not constitute a recommendation. Nor is it a complete description of the securities, markets, or developments referred to herein. Opinions are subject to change without notice. Information has been obtained from sources considered reliable, but we cannot guarantee that it is accurate or complete. Past performance does not guarantee future results. Investing involves risk and you may incur a profit or loss.
