Quarterly Market Review: 2017.Q3

Below you’ll find a summary of 3rd quarter and year-to-date returns for a handful of market indexes covering the globe.

Stocks continued to perform extremely well in the third quarter boosting year-to-date returns well into the double-digits. The top performing assets were foreign stocks with emerging market stocks more than doubling the returns of the U.S. stock market. Broad commodities have been the poorest performer for the year so far.


Note: Clients, you can find index risk and return data on the “Risk / Return” tab of your portal. You may also check out the “Performance By Sub-Asset Class” tab for more portfolio and asset class performance info as well.

Economy
As far as the economy itself…auto and retail sectors continue to struggle while broad-based economic growth (as measured by GDP) continues to be sluggish even as stock markets soar to record highs. Based on preliminary GDP estimates for the third quarter, annualized GDP for 2017 appears to be running between 2.0% – 2.5%. This continues the trend of sluggish growth and the weakest recovery in history.

Market Valuations
Stock market valuations are near Great Depression and Dot-Com Bubble levels, which is the result of a soaring stock market during a time of sluggish economic growth. The disparity between asset prices and underlying economic fundamentals continues to widen potentially setting the market up for turbulence (increased volatility) in the next couple of years (timing is impossible).

Debt
As I wrote last week, debt levels in the U.S., both private and public, continue to be a grave concern and will likely continue to act as an anchor on economic growth. I believe the United States’ extreme debt levels (public and private) is the primary reason for the sluggishness of this recovery. I believe the U.S. is in the early stages of a long debt deleveraging cycle.

Upcoming Quarter
The upcoming quarter should be interesting for several reasons.

The Federal Reserve begins reversing their balance sheet expansion (i.e. Quantitative Tightening 1 – QT1) this month. In other words, the Federal Reserve is going to stop reinvesting $10 billion per month of proceeds from their treasury and mortgage holdings. It is expected that amount will grow each quarter. The implication is that the Fed’s balance sheet will stop growing (or grow more slowly). This is a reversal of the emergency measures initiated during the financial crisis.

Janet Yellen also hinted at another interest rate hike before the end of the year, which would put the Fed Funds Rate at 1.25%-1.50% (still an extremely low level). It’s nice to see the Fed continue down the path of normalization, but they still have a very long way to go. I expect the U.S. economy will be in another recession before the Fed fully normalizes their balance sheet and interest rates to “non-emergency” levels. I just spoke with a client who maintains an adjustable-rate mortgage. Their rate is jumping to 4.0% from 3.25%. 4.0% is still very low in the scheme of things, but that is a large increase so I wonder how these rate hikes will begin affecting homeowners pocketbooks and savings rates across the nation.

The holiday shopping season will be upon us very soon so market-watchers will be keeping a close eye on that in an attempt to gauge the financial health of consumers. Given extremely high debt levels and slow wage growth along with very low home-ownership rates, I do not expect a dramatic surge in retail spending.

Finally, this quarter, we should have a better idea of what, if any, tax reform we’ll get. I’ve read through the current Administration’s outline and will write a separate commentary on the proposal as it stands today along with my thoughts for you.

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Past performance is no guarantee of future results.

Data provided herein is from third-party sources believed to be reliable, but there is no guarantee of accuracy.

Information herein is for educational purposes only and is not intended to investment advice. Always consult a professional who intimately understands your unique circumstances, goals, and risk tolerance.

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