The U.S. stock market was up 1.28% for the third quarter of 2019 and up 20.40% year to date.

Market volatility increased during the past quarter.  August, September and October are the most volatile months for the stock market historically.  The trend is certainly holding true this year.  

The U.S. economy is in the late phase of the business cycle.  However, the current cycle has been going on much longer than the average, so estimates when it will finally end are best guesses.  We are still experiencing full employment, meaning everyone who wants a job has a job.  And employment data remains strong.  70% of U.S. GDP growth comes from consumer spending, so when everyone has a job, consumer spending is good.

Trade negotiations between the U.S. and China have produced mostly negative news which caused the market to drop and add to fears that tensions would hurt economic growth and bring on a recession.  But on Friday we finally received news that the first phase of a trade deal has been agreed to.  This first phase delays tariffs, significantly increases purchases of U.S. agricultural commodities by China, agrees to intellectual property measures, and allows U.S. financial service companies to operate in China.  The deal needs to be written and signed, so expect volatility to continue.  Phase two will deal more with intellectual property and forced technology transfer, which are the core problems that need to be fixed.

The Federal Reserve’s dovish stance continues to have a positive effect on the stock market.  The Fed reduced rates and has even begun to purchase short term U.S. treasuries to create liquidity in the market.

Growth in Europe and China continued to slow, adding to recession fears.  China undertook several stimulus measures to boost their economic growth, but so far, they have only stabilized their economy.  The tariffs have really hurt China’s economy.

Germany joined other European central banks that have lowered interest rates so much they are negative.  Investors are paying those central banks to hold their money.  Crazy.

The volatility should calm as we move into the winter months.  The fourth and first quarters are the best for corporate earnings, which drive the market.  And for consumer spending, which drives the economy.

The U.S. stock market was up 4.20% for the second quarter of 2019 and up a whopping 18.88% for the first half of the year.  The volatility that returned to the market in recent months continued in the second quarter.

The market rose and fell with the ebbs and flows of the trade deal between the U.S. and China.  The news was very positive and appeared China was making the necessary concessions to come to an acceptable deal, but in April China backed out of the process.  It appears the hard liners in China are fine with trade talks but not in making any substantial changes.  Talks are back on and a meeting between President Trump and President Xi Jinping appears in the offing.  A trade deal would boost the market, although the boost would be short lived, as the market has baked in most of the positives of a trade deal.

The U.S. economy’s growth accelerated in the second quarter.  The latest estimate for first quarter 2019 GDP is 3.1%.  The employment situation slowed in May, but picked up again in June.  The unemployment rate is holding steady at 3.6%.  The calls for a recession have calmed because there is no evidence we are headed for one.   

The Fed is taking its “dovish” stance to new levels, as the market is now expecting the Fed to lower rates as soon as the next Federal Reserve Board meeting this month and possibly twice this year, which has boosted the stock market.  But Chairman Powell has reiterated several times that any changes in rates will be data dependent.  Based on the number of jobs added last month, the data does not appear to support a cut in interest rates at this time, at least not two cuts. 

Corporate earnings came in better than expected in the first quarter, but they were still only slightly better than flat.  Earnings growth is expected to be flat or lower in the second quarter, which will certainly add to market volatility. 

With respect to economic growth and earnings, the U.S. economy historically slows in the summer months, so it is normal for GDP to dip, which in turn causes earnings to dip. 

Global economic growth is slowing, but what is new?  The uncertainty over Brexit is slowing things in Europe.  Growth in China has slowed but is holding up due to the actions taken by the government.  More action may be needed if the trade spat with the U.S. continues much longer.

Expect the market volatility to continue.  If you are uncomfortable with the volatility please contact me and we can discuss and adjust.  I expect the stock market to continue to perform well, but investors need to keep in mind the market is up 18% year to date.  That is outstanding.  It would be remarkable to see the performance for the second half of the year match the first half.

The U.S. stock market was up an astonishing 14.09% for the first quarter of 2019.  The market recovered from the worst quarterly performance since 2011 with the best quarterly performance in ten years. 

I think it is important to reiterate a fact I preach during market drops – that they are terrific buying opportunities.  Anyone who contributed to their 401(k) in the fourth quarter of 2018 bought amazingly strong and profitable companies at super discounted prices.  Stock prices in December may turn out to be prices that aren’t seen again for many of those stocks.

There were several catalysts for the recovery:

  • The drop in the fourth quarter last year was an over-reaction that created an over-sold market. Investors couldn’t resist the super discounted stock prices.
  • Fed continued its “dovish” outlook for interest rate hikes by confirming there will be no more hikes until economic data supports a hike. And the Fed will slow and discontinue the process of reducing the balance sheet. 
  • Optimism for a trade deal with China. Trade talks have progressed and the most recent news is that the major issues have been negotiated and agreed upon.

The market will certainly be boosted by a trade deal with the U.S. and China.  The level of the boost will be driven by how the good the deal is. But the boost is likely to be short term. 

Once the boost from a trade deal has passed the market will go back to be driven by the normal factors, namely corporate earnings.

Corporate earnings season for the first quarter has just begun.  So far the news is mostly good.  However, earnings growth is expected to be flat this quarter and next.  If that is the case, market performance should also be flat.  The earnings outlook for later this year is good.  And earnings could be surprisingly good this quarter, which would improve market performance.

The U.S. is economy is late in the business cycle.  We have full employment – there are more job openings than unemployed people.  The natural cycle means our economy will shrink, but there is zero evidence we are headed for a recession.  Thanks to cable TV there will always be small, loud group that thinks we always heading to hell in a hand basket.  Economic growth could just slow for a couple quarters than go back to a growth cycle.

The recent hoopla over the bond yield curve inverting was driven by that small, loud group.  An inverted yield curve occurs when long term bond yields drop below short term bond yields and turn the graph line representing the yield curve from a normal upwards curve to an inverted curve or frown.  An inverted yield curve has preceded a few recessions, but not every instance of an inverted yield curve has preceded a recession.  Currently, the yield curve has been affected by the Fed keeping interest rates at low rates and reducing the balance sheet.  We have full employment, it is impossible for a recession to occur when everyone is working.

The U.S. stock market was down an astonishing -14.08% for the fourth quarter of 2018, and down -5.05% for the year.  The fourth quarter was the worst quarter for U.S. stocks since 2011 and the first down year since the financial crisis in 2008.  The U.S. market was down double digits for the year in late December before gaining nearly 7% during the final trading days of the year.

Following a strong first nine months of 2018, the end of the year was disappointing.  A myriad of issues overwhelmed investors and overshadowed the health of the U.S. economy: divided Congress; trade disputes; monetary policies; Brexit and low oil prices.

The selloff was reminiscent of market fears during the financial crisis a decade ago.  However, the comparison is unreasonable because today the stock prices of many successful companies, across most sectors, are trading at significant discounts.

Computer driven trading programs, which account for approximately 85% of all trades play a role in the extreme volatility.  Their trading formulas are closely held secrets, but the algorithms react to stock price movements.  When stock prices fall below certain support levels, the algorithms automatically trigger the sale of stocks.  The also occurs in the reverse, as we saw on the Wednesday following Christmas when the Dow Jones Industrial Average rallied, gaining over 1,000 points in a single day!

The trouble all started in October when Federal Reserve Chairman Powell stated current interest rates were a long way from neutral, leading investors to believe that many more interest rate hikes were coming.  Investors are very wary of the Fed raising interest rates too fast and causing a recession, which they have done in the past.  In the Fed meeting at the end of December he changed his tone considerably, indicating there is no policy to continue raising rates and that the Fed will be patient as they watch how the economy evolves and that they are prepared to adjust policy quickly and flexibly, as needed.  Now the Fed is expected to leave interest rates at the current level through June.

In addition to lowering interest rates during the financial crisis, the Fed, through quantitative easing, purchased $4.5 trillion in U.S. treasuries and mortgage backed securities to infuse liquidity (cash) into the economy and stock market.  Last year they began the process of reducing the balance sheet by letting the bonds mature to the tune of $50 billion every month.  This process takes liquidity out of the economy and stock market, which is not good for either.

The main driver of all the volatility is the fear that economic growth will slow.  The economy and all natural things move in cycles.  Currently the U.S. economy is late in the business cycle, and at peak cycle.  We are experiencing full employment – meaning there are more jobs than workers.  That natural cycle for the economy means it will slow as we move out of the current peak.  That does not mean the economy will fall into recession, as many in the media constantly opine.  To the contrary, there is no evidence a recession is coming.  The current environment of low unemployment, higher wages and lower fuel prices is not consistent with a recession in the near or intermediate term.

Global economies are slowing, including China.  But the government in China is taking action to bolster their economy.  Economic troubles are the norm for the EU and Japan where economic growth has been minimal for a very long time.  The latest troubles: Italy, Brexit and the same problems in Japan will hamper growth but should only have a slight effect on our economy.

The trade dispute between the U.S. and China appears to have moved to the negotiations stage.  Threats of new tariffs and tough talk have been replaced by talks of negotiations and an easing of tensions.  We are requiring China to significantly change the way they treat U.S. companies in their country.  That type of change won’t come all at once or right away.  But when the two sides begin to create meaningful agreements, the U.S. stock market will soar.

Corporate earnings results have just started to be announced.  They will have a big impact on the market because corporate earnings drive the stock market.

Economic highlights for the quarter…

GDP:  Real GDP growth grew at 3.4% annualized in the third quarter.  Consumer spending (the real driver of our economy) and private investment were the main contributors to real growth, while government spending increased slightly.  Businesses grew inventories significantly during the quarter, adding more than 2% to economic growth.  The Fed projects GDP growth of 2.3% for 2019.

Interest rates:  The Treasury yield curve inverted by year end in the short to intermediate range, while yields fell across most maturities,  For the past year, however, yields are up, particularly in the shorter end of the curve.  The year Treasury yield decreased by 0.37% during the quarter, finishing at 2.69%.  The Fed raised its benchmark rate by 0.25% at their December meeting, but decreased the projection for 2019 to only two rate hikes, instead of three.

Note: an inverted yield curve is typically an indicator of an upcoming recession.  However, we are in uncharted territory.  The Fed held interest rates at historically low levels for almost 10 years and through quantitative easing purchased $4.5 trillion in U.S. treasuries and mortgage back securities.  Now they are raising rates and rolling off $50 billion in bonds every month.  Both of these actions are causing the yield to invert.

Inflation:  Consumer prices continued to exhibit modest increases in 2018. The Consumer Price Index was up 0.4% for the three month period ending November 2018 and was up 2.2% year over year ending November 2018.  The ten year breakeven inflation rate fell rather dramatically during the fourth quarter, falling 2.14% in September to 1.71% in December, the largest decline in three years.

Employment:  Jobs growth has been solid during 2018, with total nonfarm payrolls increasing by an average of 170,000 jobs per month during the three months ending November 2018.  The unemployment rate remains below 4%, a mark not seen since 2000.

Housing:  Home prices continued to move higher during 2018, with the S&P Case-Shiller 20 City Home Price Index up 0.9% for the three months ending October 2018.  During the past twelve months the index is up 5.1%.

The recent market drops have given all 401(k) participants the opportunity to buy amazing companies at super discounted prices.  Some of the world’s largest, most profitable companies are on sale for 20% off.  That is the best deal I have seen in a very long time.

If you have any questions, please contact me.

 

The U.S. stock market was down an astonishing -14.08% for the fourth quarter of 2018, and down -5.05 for the year.  The fourth quarter was the worst quarter for U.S. stocks since 2011 and the first down year since the financial crisis of 2008.  The U.S. market was down double digits for the year in late December before gaining nearly 7% during the final trading days.Following a strong first nine months of 2018, the end of the year was disappointing.  A myriad of issues overwhelmed investors and overshadowed the health the U.S. economy: divided Congress, trade disputes, monetary policies, Brexit and low oil prices.

The selloff was reminiscent of market fears during the financial crisis a decade ago.  However, the comparison is unreasonable because today the stock prices of many successful companies, across most sectors, are trading at significant discounts.

Computer driven trading programs, which account for approximately 85% of all trades, play a role in the extreme volatility.  Their trading formulas are closely held secrets, but the algorithms react to stock price movements.  When stock prices fall below certain support levels, the algorithms automatically initiate the sale of stocks.  This also occurs in the reverse, as we saw when the Dow Jones Industrial Average rallied on the Wednesday following Christmas gaining over 1,000 points in a single day!

The trouble all started in October when Fed Chairman Powell stated current interest rates were a long way from neutral, leading investors to believe that many more interest rate hikes were coming.  Investors are very wary of the Federal Reserve raising interest rates too fast and causing a recession, which they have done in the past.  At the end of December he changed his tone considerably, indicating there is no policy to continue raising rates and that the Fed will be patient as they watch how the economy evolves and that they are prepared to adjust policy quickly and flexibly, as needed.  Now experts expect interest rates to remain at current levels through June.

In addition to lowering interest rates during the financial crisis, the Federal Reserve, through quantitative easing, purchased $4.5 trillion in U.S. treasuries and mortgage backed securities to infuse liquidity (cash) into the economy and stock market.  Last year they began the process of reducing the balance sheet by letting the bonds mature to the tune of $50 billion per month.  This process reduces liquidity which is not good for the stock market.

The main driver of the volatility at the end of the year is the fear that economic growth will slow.  The economy and all natural things move in cycles.  Currently the U.S. economy is late in the business cycle, and at peak cycle.  We are experiencing full employment – meaning there are more jobs than workers.  The natural cycle for the economy means it will slow as we move out of the current peak.  That does not mean the economy will fall into recession, as many in the media constantly opine.  To the contrary, there is no evidence a recession is coming.  The current environment of low unemployment, higher wages and lower fuel prices is not consistent with a recession in the near to intermediate term. 

Global economies are slowing, including China.  But the government in China is taking action to bolster their economy.  Economic troubles are the norm for the EU where economic growth has always been minimal.  The latest troubles: Italy and Brexit will hamper growth, but should have only a slight effect on our economy.

The trade dispute between the U.S. and China appears to have moved into the negotiations stage.  Threats of new tariffs and tough talk have been replaced by talks of negotiations.  We are requiring China to significantly change the way they treat U.S. companies in their country.  That type of change won’t come all at once or right away.  But when the two countries begin to create meaningful agreements, the U.S. stock market will soar.

Corporate earnings announcements have just started.  This will have a big impact on the market because corporate earnings drive the stock market.

Economic highlights for the quarter…

GDP: Real GDP growth grew 3.4% annualized in the third quarter.  Consumer spending and private investment were the main contributors to real growth, while government spending increased slightly.  Businesses grew inventories significantly during the quarter, adding more than 2% to economic growth.  The Fed projects GDP growth of 2.3% for 2019.

Interest rates: The Treasury yield curve inverted by year end in the short to intermediate range, while yields fell across most maturities.  For the past year, however, yields are up, particularly in the shorter end of the curve.  The 10 year Treasury yield decreased by 37 basis points during the quarter, finishing at 2.69%.  The Federal Reserve raised its benchmark rate by 0.25% during their December meeting, but decreased their projection for 2019 to only two rates increases instead of three.

Note: an inverted yield curve is a typically an indicator of an upcoming recession.  However, we are in uncharted territory.  The Federal Reserve held interest rates at historically low rates for almost 10 years and through quantitative easing purchased $4.5 trillion in U.S. treasuries and mortgage backed securities.  Now they are raising rates and rolling off $50 billion bonds every month.  Both of these actions are causing the yield curve to invert.

Inflation: Consumer prices continued to exhibit modest increases during 2018.  The Consumer Price Index was up 0.4% for the three month period ending November 2018 and was up 2.2% for the trailing one year period ending November 2018.  The 10 year breakeven inflation rate fell rather dramatically during the fourth quarter, falling from 2.14% in September to 1.71% in December, the largest decline in three years.

Employment:  Jobs growth has been solid during 2018, with total nonfarm payrolls increasing by an average of 170,000 jobs per month during the three months ending November 2018.   The unemployment rate remains below 4%, a mark not seen since 2000.

Housing:  Home prices continued to move higher during 2018, with the S&P Case-Shiller 20 city Home Price Index up 0.9% for the three months ending October 2018.  During the past 12 months, the index is up 5.1%.

The recent market drops have given all 401(k) participants the opportunity to buy amazing companies at super discounted prices.  Some of the world’s largest, most profitable companies are on sale for 20% off.  That is the best deal I have seen in a very long time.

If you have any questions, please contact me.

 

 

Before discussing the third quarter, I need to address the recent volatility in the market.  The market has experienced significant volatility last week reacting to higher interest rates.  Interest rates are rising, but they are still at historical lows. 

We have experienced very low interest rates for over nine years.  The latest volatility in the market started when the 10 year bond rate went over 3%.  The long term average is 6%, so we are a long way off from the average.  The speed at which rates rise is an issue, but rates are not spiking. 

High interest rates are generally an indicator of inflation which is an indicator of an oncoming recession.  None of the major recession indicators indicate a recession is near or likely.

There is evidence of some inflation, but it is modest.  Inflation has been almost zero for many years now.  While that means prices are not rising, it also means wages and incomes are also not rising.  Wages and income have been flat for many years now.  Part of a healthy, growing economy is growing wages and income.  As with interest rates, the speed at which prices, wages and income increase is an issue, but none are spiking.

Both rising interest rates and mild inflation are to be expected at this point and represent a growing, healthy economy and market.  The volatility of the last week is not based on any major underlying issue.  The fundamentals of the economy are very strong and holding.  Same with the stock market, earnings are strong and stocks are not over-priced.

Two technical issues arose this past week that had an effect on the market downturn.  First, when stocks drop below certain price (support) levels, the computer driven algorithms that run some large hedge funds, trigger the funds to sell stocks.  That occurred on Monday, when a 300 point drop suddenly became an 800 drop.  It is important to note that the same phenomenon occurs in the reverse during a market rally.  The second issue occurred on Tuesday.  Margin calls caused the market to drop midday.  Investors who buy their stocks on credit must put up their stocks up as collateral.  When the value of their stocks drop below stated minimums, they must deposit more money or investments in their accounts or stocks are automatically sold to cover the drop.

The market ended the week showing signs of stabilizing and bouncing back, although the market lost some ground today.  Third quarter earnings announcements have just begun.  Earnings are expected to be positive, however, companies’ outlook for the next quarter may create some volatility. 

Now back to our regularly scheduled program: the U.S. stock market had an amazing third quarter, increasing 7.22% for the quarter.  That is the strongest quarterly increase in nearly five years. 

The third quarter began with very strong corporate earnings reports with the vast majority of public companies beating consensus earnings estimates.  Tax cuts continued to support corporate profits.  But the Fed’s interest rate hikes and US – China trade tensions exacerbated volatility.

Although trade is an issue, the U.S. made positive strides during the quarter with a preliminary re-negotiated trade deal with the EU, a finalized deal with the South Korea, and a re-negotiated deal with Mexico and Canada.

Highlights from the quarter:

  • GDP growth boomed to 4.2% on an annualized basis during the second quarter of 2018.
  • Interest rates rose across the yield curve, with the biggest increases coming in the three years and below range. This caused the yield curve to flatten, which has historically been a sign the economy is going into recession.  But that is not the case now.  The flat yield curve has more to do with the Fed keeping short term rates artificially low for many years and now selling the bonds they bought as a part of quantitative easing.
  • Inflation increased slightly
  • Employment – job growth has been solid in 2018. The unemployment rate has dropped below 4%.
  • Housing market continued to do well.

Looking forward, we are heading into the fourth quarter which is one of the best quarters historically.  Experts expect the economy and market to continue to perform well.  You will hear lots of talk regarding the issues the market will have be facing next quarter and next year.  There are definitely “headwinds” facing the market: higher interest rates; higher wages; and higher costs related to tariffs.  But, again, we have had historically low interest rates, no inflation and no wage growth for many years.  These things must increase.  It is the speed with which they increase that could be an issue.  Trade tariffs are a tactic being used to obtain better trade agreements and in the case of China, to also stop them from stealing our technology and intellectual property which costs the U.S. billions every year.  The tariffs have achieved results and show signs that more trade deals will be done.  You hear a lot about tariffs increasing costs, which is true, but in all my research I have yet to hear of another tactic that has any chance of obtaining better deals and stopping the Chinese from stealing our technology.  Tariffs take time to achieve their goals.  The stock market in China is down over 20% since the tariffs started.  The Chinese government has had to artificially stimulate their economy to stabilize it.  The Chinese government also controls public discourse so no one complains which gives them time to hold out.  But their economic situation is not good because of the tariffs and shows no signs of improvement.

The U.S. stock market got back on track in the second quarter, increasing 3.71% for the quarter, however returns for the major benchmarks varied considerably.  The market is up 3.08% year to date.

The market started the quarter off with a fairly significant drop, but performed solidly throughout the quarter, driven by very good corporate earnings which are the still benefiting from the corporate tax cuts and outweighing the negative impact of the news on trade tariffs. 

The economy continues to grow at an accelerated rate.  Estimates for GDP growth in the second quarter are above 4% which would be the highest growth rate in a long time.

Unemployment is at an all-time low.  This causes wages to increase and the data shows wages are finally starting to increase after being flat for over ten years.  Higher wages drive inflation, so inflation is also starting to increase.  Higher inflation causes the Fed to raise interest rates.  Higher interest rates hurt the stock market.  Because why invest in stocks if you can earn a good rate of return from a bond?

The Fed raised interest rates, as expected, by another 0.25%.  The Fed is still expected to raise rates two more times this year.  While the Fed raising rates too fast is a fear that is much discussed in the media, the current Head of the Fed is unlikely to increase rates too fast.  It is not in his background.

Interest rates continued to tick higher, but a slower rate, while remaining historically low.  The yield curve flattened, which is normally a predictor of an upcoming recession. It is not at this time because interest rates have been held so low for a long time.

The housing was market was mixed, with flat sales and increasing prices.

The global economy continues to grow, but at a slower pace.  China has slowed and their government has undertaken actions to stimulate growth.  Growth in the EU has been good, but appears to be slowing and they face issues with several members.

Just a word on the “trade wars” – one of the media’s favorite discussions is tariffs.  Pundits speak of the economic damage that has been done by tariffs in the past, which is correct.  But the market seems to viewing President Trump’s tariffs and threats of tariffs as a bargaining tool.  Based on the agreement the U.S. reached with the EU this week, that appears to be correct because both sides have agreed to stop with new tariffs and have agreed to review their current trade agreements.  Also, China would suffer much greater economic and social damage from a full blown trade war than the U.S.  You just have to look at the amount of goods we buy from them.  Their economy is already slowing.  Tariffs would significantly slow their economy.  It appears to me, based on the how the market is reacting, tariffs and the threat of tariffs are a negotiating tactic.  And they won’t be in place for an extended period of time.  Only time will tell, but I think it’s prudent to give these tactics some time to work. 

The outlook for the market is positive.  The economy is growing and corporate earnings are high.  Actually the economy is growing at an accelerated rate when historically growth slows, so we are not experiencing the traditional summer.  A lot of investors are concerned that the market has been doing well for so long that a downturn is in order, but there are no signs to indicate a downturn is coming.  However, when investors feel like the market is due for a correction, a small drop can turn into a bigger event because of investor sentiment.

As always, please contact me if you have any questions or concerns.

In last quarter’s commentary I indicated that volatility will return to the market and it did, with gusto.  After a strong start volatility spiked in the first quarter, causing the market to drop 0.61% for the quarter.  Throughout January, the market appeared to be on the same track as 2017, moving up, hitting new records with little volatility.  Investors cheered the passage of the corporate tax cuts that encourage corporations to bring their foreign profits back to the U.S.  Strong economic data and fourth quarter earnings that came in much better than expected further boosted investors’ positive sentiment.

Then in February volatility abruptly returned to the market with a jobs report that showed an increase in new jobs and a very healthy gain in the average hourly wages paid in the U.S.  The market plunged as investors worried that increases in wages (inflation) would push the Federal Reserve to raise rates more quickly than anticipated.  Increases in the 10 year treasury yield have also increased fears that inflation is on the rise.  Inflation is a sign that the economy is overheating and possibly headed for a slowdown or recession.  However, normal inflation is not bad; it is part of a healthy economy. 

As the quarter came to a close, fears that the economy was overheating were replaced with fears of trade wars.  On March 1, President Trump, in a surprise move, imposed tariffs on imported steel and aluminum.  The tariffs were later revised to exclude many countries, but not China.  China responded with threats of their own tariffs on US imports.  However, President Trump just announced that some of his top economic advisors are headed to China to begin trade talks.

At the very end of the quarter technology stocks tumbled over concerns raised over the security of users’ data, two fatalities involving self-driving cars and President Trump’s tweets regarding Amazon.  Concerns remain over the possibility of government regulation of internet companies and the effects on their businesses.

The U.S. economy, in the first quarter, continued its upward trend with overall growth and employment posting solid gains.

  • most recent estimate for GDP growth for the fourth quarter 2017 came in at a seasonally adjusted annualized rate of 2.9%.
  • the employment situation remained very robust, far outpacing expectations
  • consumer spending continued to drive growth during the quarter.
  • inflation showed signs of picking up during the quarter.
  • housing remains robust, and analysts have a positive outlook for 2018.
  • The Fed increased rates by 0.25% in March to 1.50% to 1.75% and is expected to raise rates at least three more times in 2018.
  • The Fed also increased estimates for GDP growth for 2018 from 2.5% to 25.7%

However, economists caution that sustaining current levels of growth, at full employment could be difficult.

The Eurozone economy also grew at a rate well above trend.  Japan’s economy is expected to maintain its strong momentum into 2018.  China continued its strong growth from 2017 and experienced its first year over year gain since 2010. 

All in all, our economy is very strong.  Corporate profits are up.  Employment is solid.  But the volatility that had disappeared for almost 2 years has returned.  Please keep in mind when you listen to media reports that with current market levels, a 500 point drop isn’t that big a drop anymore.  But be aware that we are heading into a traditionally slower time for our economy.  The economy has always slowed in the summer months.  In past years some in the media have called this seasonal trend the beginning of a recession.  Given the nervousness that has returned to the market, these types of reports are likely to add to the volatility.  There is nothing to indicate we are headed for any major problems, just normal economic and market conditions with a little more volatility to make up for the lack of it previously. 

As always, stay invested and save as much as you can for your retirement.  Please contact me with any questions or concerns about your account. 

The U.S. stock market finished 2017 very strong, up 6.46% in the fourth quarter and up an amazing 21.47% for the year.  It was a truly a remarkable year for the U.S. stock market.

The U.S. stock market posted another quarter of solid gains, benefiting from the anticipation of the tax reform package, increased corporate earnings and a growing economy.  Volatility remained at historically low levels during the quarter and year.  The S&P 500 has now posted positive returns in every quarter except one in the past five years.  The last negative quarter occurred in the third quarter of 2015.

Large cap stocks generated a 6.6% return for the quarter and a 21.7% return for the year, with growth outperforming value.  Small cap stocks under-performed large caps, finishing the quarter with a 3.3% return and a 29.6% return for the year, with growth also outperforming value.  The NASDAQ finished the quarter up 6.6%, and up 29.6% for the year. 

International stocks performed well but lagged behind the U.S. stock market.  European economies continue to grow as domestic demand has increased and monetary policy remained extremely accommodative.  China continued with structural reforms to their financial systems which has slowed growth but reduced debt.  International stock indices were all higher, with the global index (world markets outside the U.S.) was up 5% for the quarter.  The index measuring developed markets was up 4.2% for the quarter and 25% for the year.  Emerging markets continued to perform very well, up 7.4% for the quarter and 37.3% for the year.  I always caution investors that emerging markets are consistently either the best or worst performing asset class.

The U.S. economy remains very strong and continues to grow despite the headwinds from political infighting and geopolitical tensions.  GDP is estimated to be 3.2% for the third quarter of 2017, which is down slightly from the prior estimate, but a bit higher than the second quarter at 3.1%. 

The global economy benefited from increased demand as well as accommodative monetary policies.  The Eurozone grew at a 2.6% annual rate in the third quarter, continuing the positive trend.  Japan also continued to fare well and China continues to grow, even while implementing economic reforms.

The employment situation continued to improve. 

The Federal Reserve increased interest rates by 0.25% and confirmed its commitment to raise rates in 2018.

Consumer spending slowed, but was offset by an increase in inventories.

Inflation increased slightly.

Corporate earnings grew.

Economists expect wages to increase as the economy reaches full employment.

Housing market continues to grow and looks positive for 2018.

The outlook for 2018 is positive, however, volatility will return to the market.  In 2017 the market climbed steadily without pause for the entire year, regardless of the news.  2018 will have more normal market volatility.  The tax reform will have a positive impact on businesses and consumers.  Businesses across the board will see a reduction in their taxes.  Individuals will see an increase in their take home pay as the first $24,000 of income for married couples will be tax free and the rates for all the other brackets have been lowered.  Everyone will also see an increase in their standard deductions.  A small number of people will have their state property and income tax deductions capped as well as their mortgage interest deductions.  But the majority of people will pay lower taxes.  The benefits to businesses obviously benefit their employees.  We have already seen a slew of businesses give out bonuses, pay raises, increased 401(k) matches and better employee benefits.  A raising economy floats all boats.

The U.S. stock market continued to perform well in the second quarter, up 3% for the quarter and up 9% year to date.

Strong earnings drove the market higher with the bulk of the gains coming in late April and May as first quarter earnings reports outpaced even elevated expectations.  The overall earnings for the S&P 500 rose almost 14% compared with the quarter a year before.  This marked the second straight quarter of earnings increases, following five quarters of declines. 

Growth companies also drove the market higher with their innovative technologies and processes.  Technology leaders like Bezos, Zuckerberg, Gates and Cook are all working to expand into new areas and continue to increase returns for their shareholders.

The Federal Reserve Bank raised interest rates, as planned, in June for the second time this year raising the rate to 1.00% – 1.25%.  The Fed also announced plans to begin trimming its $4.5 trillion balance sheet towards the end of the year, unwinding the extraordinary stimulus it employed during the financial crisis.  Both these are key steps in normalizing the Fed’s involvement in the economy.

Economic data released during the quarter suggested continued growth, but not necessarily at a rate to allow double digit earnings growth.  Job growth remained on track, but at a slower pace and home sales picked up in May.  Overseas economies, particularly in Europe, appeared to be more stable.