Markets did well in the 3rd quarter, primarily due to the Federal Reserve maintaining low interest rates and an economy that continues to show gradual improvement. While this economic expansion is now the fourth longest since WWII, it is also the slowest and has produced total growth that is fractional compared to previous expansionary periods. Perversely, this slower rate of growth could allow stocks, which are in their 8th year of a bull market, to continue rising. Even at this late stage, we are not observing the usual signals of overheating typical of market tops.
With the presidential election next month and an eventual resumption of Fed interest rate hikes, we expect market volatility to increase before year end and have positioned our portfolios for some anticipated potential bumps. However, we are encouraged by the strong consumer spending boosted by low energy costs, a more stable dollar that benefits exporters, and corporate earnings positioned to improve dramatically in 2017. The biggest unknown, of course, is how the unwinding of the global monetary stimulus plays out. If global growth accelerates as expected, central banks will be able to transition from highly stimulative to neutral in an orderly fashion. Our concern is that monetary policy has reached its limits and future growth will require more political will than some countries can muster. Policies that enable private sector job growth should be a top priority of the next administration’s agenda, whoever that may be.
Looking ahead, the 4th quarter is historically the strongest for stocks despite higher volatility that frequently occurs in October. Earnings reports, which begin to be announced next week, will be critical. The market has advanced despite weak overall earnings the past few quarters and is discounting strong improvements going forward. If fundamental support doesn’t materialize, coupled with higher interest rates, the market may begin to appear overvalued.
At Clear Rock, our objective is to customize portfolios according to each client’s long term risk and return objectives with an asset allocation strategy designed to absorb short term volatility. The inclusion of strategies that reduce correlation with stock price movements and protect capital in down markets will help us achieve those long term goals.
Looking Back at the 3rd Quarter
- Small Cap stocks performed well as the market moved to a “risk on” period post Brexit
- Emerging Markets equities performed well as commodities and currencies improved
- High Yield Corporates performed well as fears of mass defaults in the energy sector subsided
- Emerging Markets Debt performed well as these economies showed improvement and spreads tightened
- MLPs performed very well as energy prices continued to stabilize and demand remained strong
- Managed Futures performed poorly due to intra-quarter price trend reversals in stocks and commodities
Chief Investment Officer