Key Points:
- Global economic growth continues to trend higher
- September saw a record for stocks, hitting all-time highs
- With failed attempts to alter healthcare, congress has tax reform front and center
The world continues to recover from the lows of the financial crisis. Above trend global economic growth, muted inflation and low volatility in the markets have created the backdrop for a positive investing environment for risk assets this year. While the U.S. may see a dip in economic growth from the disastrous hurricanes in the fourth quarter, the expansion continues to be on track.
Stocks across the globe performed well in September. The S&P500 gained 2.06% for the month and ended the third quarter up 4.48%. For the year, the S&P500 has gained 14.24%. Value stocks reversed their trend of underperforming growth this year, up 2.96%. Energy (+9.94%), financials (+5.14%) and telecom (+3.52%) were the leaders in value. Growth stocks took a breather from their torrid pace but still gained 1.30% in September. They have gained 20.72% this year. Technology stocks were relatively flat (+0.64%) as the big tech firms (Apple, Amazon and Facebook) saw investors taking profits. Small cap stocks saw a boost from potential tax reform, gaining 6.24% in the month. Mid cap stocks also outperformed large cap counterparts gaining 2.77%.
International developed stocks gained 2.49% in September. Strong gains in Germany (+5.55%), France (4.29%) and the UK (3.32%) led the charge. Asian markets also performed well with Russia (+4.47%) Japan (+1.96%) and China (+1.04%) performing well. Continued Brexit talks and the ongoing situation with North Korea seem to have settled in with international investor’s perspectives.
The Fed decided to not raise the Fed Funds rate during their September meeting. Market interest rates increased on the news. We noted that the last time the Fed raised rates market interest rates declined. This illustrates just how fluid and transparent the Fed has been with respect to normalizing interest rate policy. According to Nuveen Asset Management, the market is pricing in a 70% probability of a rate hike this December. If the market is expecting this rate increase with a high probability, it becomes less of a shock to the market and prevailing rates. Higher than expected inflation in the market could be a catalyst for rate spikes.
The Barclays US Aggregate Bond Index slipped 0.48% in September as interest rates increased across the board. The 10-year Treasury yield hit an intra-month low of 2.06% before climbing to 2.33% to close out the month. Long dated Treasuries were the worst performers while high yield and investment grade corporate bonds held up the best.
Sources: Morningstar, Nuveen, BlackRock