The end of September marked the end of the third quarter, a strong period for U.S. stocks but lackluster for almost all other major asset classes.
During September alone, foreign developed stocks posted gains and outpaced their U.S. counterparts, while emerging markets continued a downward trend. Within U.S. equities, small-cap stocks sharply reversed after outperforming in August, ending the month in negative territory. A strong rally in oil prices boosted energy stocks and commodities, while bonds and gold posted declines amidst higher U.S. interest rates.
Most of the same stories continued to dominate headlines. There was a brief period when global trade tensions appeared to ease, but relations between the U.S. and China soured yet again. Regardless, daily reactions to the news appear to be diminishing—a sign of investors’ increased acceptance that the trade conflict could be a long and drawn out process.
With respect to interest rates, the U.S. Federal Reserve raised its target benchmark rate by 0.25% for the third time in 2018, while simultaneously providing an upbeat assessment of the U.S. economy. This was widely expected and lends further support to another expected hike in December, and potentially three more in 2019.
As we approach November, the U.S. midterm elections are likely to capture an increasing share of the spotlight, with many expecting Democrats to take control of the House. A divided Congress would likely mean more noise and investigations, but less action. This may be a positive for stocks, which tend to enjoy a softer legislative agenda. Moreover, the calendar year following midterm elections has historically been very strong, posting an average annual return of approximately 17.9% since 1927.