The third quarter was the best-performing quarter for markets so far this year. Major U.S. stock indices each hit new all-time highs in September. The broad market gains were driven by strong economic data, solid earnings growth and improved clarity on global trade. Recent volatility has been blamed on rising interest rates and trade concerns.
Many positive factors have been overlooked as news headlines focus on various political firestorms and the continued uncertainty with regard to the U.S. and China trade relationship. But, in what has become a recurring theme for the 2018 market, positive economic and corporate fundamentals once again outweigh unnerving political and geopolitical headlines.
Starting with current economic growth, it’s simply the best we’ve seen in years. The final reading of second-quarter GDP showed growth above 4% annually, and according to the Atlanta Federal Reserve “GDP Now” estimates, we can expect near 4% GDP growth for the third quarter as well. For context, the last time the U.S. economy posted two consecutive quarters of annual GDP growth close to 4% was in mid-2014, and prior to that, it was late 2004!
Corporate earnings growth also remained very strong during the third quarter, as more than 80% of S&P 500 companies reported earnings above consensus expectations. According to financial data firm FactSet, that’s a record high.
Regarding global trade, concerns about the U.S. and Chinese trade relationship remain, but the third quarter also saw important resolution to numerous other trade situations. First, in July, the United States and the European Union reached a trade agreement that would prevent retaliatory tariffs and promised to investigate ways to further promote free trade between the U.S. and the E.U. Then, in August, the United States and Mexico agreed to a trade framework to replace NAFTA, and on the final day of September, Canada and the United States reached an agreement for Canada to join the existing U.S./Mexico deal, settling another potential trade dispute.
So, we started the third quarter of 2018 with four areas of trade-related concerns: The EU, Mexico, Canada and China. Positively, we begin the fourth quarter with just one area of legitimate trade concern: China. And, while the U.S./China trade relationship certainly represents a potential risk to the global economy and markets, it’s important to remember that so far in 2018, a strong U.S. economy and healthy corporate fundamentals have powered stocks higher through multiple periods of trade, political and international uncertainty—and that’s critical context to consider as we enter the final quarter of the year.
Fourth Quarter Market Outlook
Despite the recent market pullback, U.S. economic and corporate fundamentals remain very strong, and those two factors combine to provide firm support for the markets. That is an important fact to remember as those core fundamental positives have helped markets power higher in 2018 despite a return of volatility.
We fully expect continued market volatility in the fourth quarter, as investors face several potentially significant unknowns, including: US/China Trade, continued corporate earnings strength and mid-term elections.
It’s unclear how, or when, these events will be resolved, and what those implications will be for markets.
Markets always face uncertainties at the start of a new quarter, but over the long term, its core economic and corporate fundamentals that drive market returns, not the latest sensational headlines.
At Simmons Capital Group, we understand that volatility, whether it’s related to trade disputes or concerns about government policy, can be unnerving, even if it is historically typical. That’s why we remain committed to helping you navigate this ever-changing market environment, with a focused eye on ensuring we continue to make progress on achieving your long-term investment goals.
In later stages of market cycles like the one that we believe we are in, defense is often more important than offense. Attempting to avoid large losses is an important factor in achieving your long-term goals. Our years of experience in all types of markets (calm and volatile) have taught us that successful investing remains a marathon, not a sprint.
As 2018 has shown us so far, trade conflicts, political dramas and short-term market volatility are unlikely to impact a diversified approach set up to meet your long-term investment goals. Therefore, it remains critical to stay invested, remain patient, and stick to your plan.
Thank you for your ongoing confidence and trust as we navigate this changing market environment. Please feel free to contact us with any questions, comments, or to schedule a portfolio review.