US Market Viewpoints: Third Quarter 2017Submitted by Castlebar Asset Management on October 5th, 2017
The steady climb for stocks continued again this quarter with major indexes setting new all-time highs. This marked the eight-straight quarter of rising stock markets in the US. The rally was aided by improving global growth where nearly every country around the world is seeing their economies expand. In the US, a healthy consumer and increased corporate spending market has served as a catalyst. Volatility continues to remain low and this September was the least volatile on record for the S&P 500. Stocks did pause slightly after three hurricanes impacted the US or its territories and as tensions with North Korea escaladed. After these brief pauses, stocks continued their climb higher.
The record highs reached in the market saw ten of the eleven sectors moving higher in the quarter. The best performing sectors were technology (+8.1%), basic materials (+6.7%) and energy (+6.28%). Technology shares continue to push the entire market higher since it is the largest weighting in the S&P 500. Earnings growth has drawn investors back to the sector after having an off quarter in Q2. The basic materials sector has benefited from improving economic growth around the world. Chemicals and raw materials are seeing an increase in demand. Energy stocks rallied as crude prices rose above $50 a barrel. The hurricanes did causes prices to rise as some production was taken off line with Hurricane Harvey. Consumer staples stocks were the only sector to decline in the quarter. The impact of online shopping (Amazon effect) is hurting traditional brick and mortar retailer and their suppliers. The sector fell 1.3%.
The rally in stocks is not showing any signs that it will end in the near term. September tends to be a historically difficult month for stocks. The S&P 500 rallied 2.1% this September and hit new all-time highs. Since 1928 there have been 29 Septembers when the S&P 500 has hit all-time highs. 80% of the time stocks continued to rally in the fourth quarter with an average quarterly return of 3.7% return. This bodes well for stocks heading into year end.
The Federal Reserve (Fed) has laid out their plans to unwind the nine years of quantitative easing they have had in place since the financial crisis. The Fed’s balance sheet has swelled to $4.4 trillion in size which was an increase of over $2 trillion from the start of the financial crisis. The Fed is going to allow $10 billion bonds to mature each month and not reinvest the money. This quantitative tightening (QT) represents a meager 0.23% of the Fed’s balance sheet and should have limited impact on the market. Next year they expect to increase maturities to $50 billion per month. The impact on the market is unknown since we are in uncharted territory and will be something to monitor in 2018.
If there is one part of the economy that we are starting to watch closer it is housing. New home sales have been weak. This is partially because of the hurricanes, but the trend has been lower prior to the storms. Homes above $500,000 are seeing a more pronounced slowdown. The inventory of unsold homes has risen to levels not seen since 2014. The supplies of homes for sale had been historically tight over the past few years. The big question is, are we seeing a moderation in the housing market or is this the beginning of a downtrend? Housing leads an economy out of a recession and can signal that a recession is coming. We don’t have any immediate concerns with housing, but in an environment when everything looks healthy it is worth pointing out some potential areas of concern.
While stock valuation remain high they are not a reason to sell stocks today. The low inflation environment we are in allows for valuation to run above average. The S&P 500 is trading at forward P/E of 17.7 and the ten-year average is 14.1x. There are several catalysts to keep the markets moving forward. Tax reform is the first piece of legislation from the Trump administration that has an opportunity to pass. This would give companies an opportunity to spend more money on M&A, capital spending and share buy backs. Global growth continues to improve with most major markets in Europe just emerging from their post financial crisis malaise. Finally, corporate earnings domestically and internationally are strong. These items are tailwinds for stocks. There is no sign of a bubble, but we don’t want to bring some caution to today’s market. There is no signs of euphoria or excess now but higher valuations usually signal lower than average future returns. We are remaining disciplined and staying true to our investment asset allocations for clients.
You can read our 2017 Second Quarter US Market Viewpoints here.
Disclaimer: The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results.