The advisors at River Wealth are committed to enriching investors by sharing their insights and understanding of the market by regularly publishing the Market Currents in our quarterly Currents Newsletter.
Third Quarter 2018
Domestic financial markets continued to expand in the third quarter, while international markets gave ground as trade tensions, a strong dollar and increasing oil prices increased concerns about the international outlook. In addition, concerns about sovereign debt and financial stability in certain European and South American countries have amplified worries. Nevertheless, domestic economic indicators remain positive, corporate earnings are growing, and the Federal Reserve appears steadfast in their plan to normalize (raise) short-term rates, supported by a strong fundamental economic backdrop.
Global Economic Conditions – The focus in global markets has shifted from tension in the Korean Peninsula to broader concerns related to emerging market growth, trade negotiations and the impact of a stronger dollar and increasing oil prices. Recent news regarding the reworked trade agreement between Mexico, Canada and the U.S. was well received by markets, but negotiations with China loom large. Additionally, concern about the impact of increasing oil prices on energy-dependent emerging market economies has weighed on emerging markets.
Corporate Earnings – Corporate earnings remain strong. S&P 500 operating margins were at a record 11.5% in Q2, well above the 8.08% 20-year average. Earnings guidance for Q3 and Q4 remain positive with more records expected. Improved earnings numbers have kept fundamental valuation measures steady, giving the market room to expand.
Domestic Policy Activity – With the November elections near, markets are considering likely outcomes, and the associated policy implications. Expectations are that Democrats will win the majority in the House, and Republicans will hold the Senate. Markets seem poised to absorb this outcome without much fanfare. If Democrats pull off the blue wave, expect markets to react negatively as recent tax reform and deregulation will be seen as at risk.
Central Bank Activity, Rates and Inflation – The Federal Reserve is on track to increase short-term interest rates four times this year. Despite an expanding economic and employment situation, rates remain relatively low and modest inflation numbers have given the Fed room to act gradually. There is a widely held expectation that rate increases will continue over the next few years; however, the frequency or number of hikes is less clear.
Domestic financial markets have shown resiliency in the face of policy uncertainty, while international stocks have suffered the biggest blow from trade discussions and appreciation of the U.S. dollar. Total returns on fixed income investments remain under pressure from increasing interest rates. While holding fixed income assets in a fast-growing equity market sometimes leaves investors feel like they are missing out, these positions are critically important when equity returns contract.
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Past performance is no guarantee of future results and the opinions presented cannot be viewed as an indicator of future performance. The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.
Please note that this content was created as of the specific date indicated and reflects the author’s views as of that date. It will be kept solely for historical purposes, and the author’s opinions may change, without notice, in reaction to shifting economic, market, business and other conditions.
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