Over the past quarter, North Korea successfully tested a hydrogen bomb; devastating hurricanes battered Texas, Florida and the Caribbean; political dysfunction in Washington featured more Russia controversy and significant White House staff turnover; Equifax reported a massive personal data breach; and the Fed indicated it remains on track to raise interest rates another 0.25% this year while beginning the process of deleveraging its massive balance sheet. Yet through it all, the bull market remained unfazed.
Market Recap & Capital Markets Outlook
US stocks rose for an 8th consecutive quarter, and daily volatility stayed conspicuously absent. The US Total Stock market returned 4.5% for the quarter. Globally diversified investors fared better, as international stocks outperformed the US for a third straight quarter by gaining 5.9%. S&P 500 earnings growth for Q3 is estimated at 5%, according to FactSet. This is respectable, but means the majority of gains in US Stocks over the last year came from PE multiple expansion rather than earnings growth. Q2 US GDP growth was revised up to a healthy 3.1%.
Ten years ago this week, the global stock market peaked. It then slowly declined for about a year before the crescendo of the Lehman bankruptcy and near collapse of the financial system. The nine-year-old bull market added another solid quarter to the history books in Q3. There may be new scary headlines across the news, but the fundamental backdrop for capital markets hasn’t significantly changed. Valuations remain elevated – but not extreme. Economic growth and corporate earnings are solid – but not exciting. Meanwhile, major central banks including the Fed have taken their foot off the gas and are contemplating periodic light taps on the brakes.
News of a significant data breach at Equifax affected an estimated 143 million U.S. consumers. While this is not the largest breach of recent times, it may very well be the most damaging to American families due to the nature of the data that is now in the hands of cybercriminals. Our Chief Security Officer, Maxime Rousseau, shared his tips for staying safe from any potential hacks including: signing up for free monitoring, freezing and monitoring your credit file actively, keeping a close eye on your financial accounts, and complying with the latest password security standards.
There is no wall being built and the Affordable Care Act remains intact nearly a year into President Trump’s term. But we expect President Trump and the GOP will make their best effort to enact some tax reform. The next several months will probably be the last, best shot to pass meaningful legislation such as the proposed elimination of AMT (alternative minimum tax), reduction in the number of tax brackets, plan to double the standard deduction to $24,000 for married couples, tax code deduction of mortgage interest, estate tax repeal, lower rate on pass-through businesses and lower corporate tax rate.
While uncertainty ravages the globe and a current bull market will only last so long, diversification is the best tool available to manage risk while maintaining upside potential. A portfolio’s total allocation to stocks is the biggest driver of both return and risk, but diversification within stocks also remains important. The US has dominated most of this bull market, but international stocks have a healthy lead this year and we wouldn’t be surprised if the tide has shifted. A good mix of both is the best approach. At the sector level, it is important to remember what goes up the most often goes down the most. It is fine to have healthy exposure to trendy technology stocks, but it can be risky to ignore other sectors.