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 2017
Financial markets continued to climb higher during the third quarter as domestic equity markets found new highs and rapid growth in international markets endured. The underpinnings supporting equity markets include: solid domestic corporate earnings, low interest rates/stimulative central bank policies and signals of broad global economic expansion. Recently, domestic markets got an additional boost from the beginning of discussions regarding tax reform/cuts. Nonetheless, there exists a number of global risks capable of derailing markets, and maintaining a long-term perspective and appropriate risk exposure is as important now as it is when markets are in correction.
Global Economic Conditions – Global economic expansion continues to be a pillar of support for financial markets. Domestically, the economy has proceeded along its modest growth trajectory with strong employment activity, elevated consumer sentiment and the benefit of relatively low rates. Outside the U.S., Financial market valuations have rapidly expanded along with accelerating economic activity consistent with an early expansion cycle.
Corporate Earnings – In addition to improving economic conditions, domestic financial markets have benefitted from a steady expansion of earnings. After bottoming most recently in the first quarter of 2016 along with oil prices, S&P 500 earnings have grown steadily along with profit margins. Analysts broadly expect this trend to persist through 2018.
Domestic Policy Activity – Overt the past quarter, the situation in Washington D.C. hasn’t evolved much. The two most meaningful economic developments were the agreement to kick the debt ceiling discussion down the road and opening the debate over tax reform. Both topics have the potential to significantly impact markets going forward, and merit careful attention by investors.
Central Bank Activity, Rates and Inflation– The FOMC maintained the fed funds rate at 1.25 percent at its September meeting. Also in September, the Fed announced that it will begin reducing it holdings of Treasury securities in October. It is widely expected that the Fed will increase rates again this year and continue, albeit at a slower pace, increasing rates in 2018.
Geopolitical Concerns– To repeat from last quarters note, in the shadow of strong financial market performance lies a sense of concern that some unpredictable policy situation could cause systematic problems. These concerns are primarily focused on foreign relations and trade policy where relationships are complicated, delicate, and sometimes tenuous. Investors should remain vigilant of these developments that could derail other economically positive policies.
As always, we remind investors to remain focused on long-term objectives. We regularly note that; maintaining a disciplined approach during spats of volatility opens investors to opportunities, and perhaps, more importantly, prevents costly mistakes. It should also be noted, particularly at time like these, that chasing returns in steadily growing markets may have similar pitfalls.
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