The net outcome of market trading was basically flat during the 3rd quarter. Major stock indices booked a new alltime high in late July after successful quarterly corporate profit reports. Economic indicators such as job growth and consumer spending continued to expand throughout the quarter, while the manufacturing pace softened for the first time in several years. The market corrections in August were due to fears about global economic contraction, trade deals affecting the United States economy, and uncertainty about the Fed’s next steps. The Fed, continuing to forecast and communicate its intentions, carried through with two anticipated rate cuts in July and September. The reasoning for the reduction was to further provide a buffer against international economic weakness. The market responded favorably and resumed its upward climb. The Dow Jones Index ended flat for the quarter, and the S&P 500 gained 1.7%. Bonds gained 3% in aggregate. For the year-to-date, major stock indices have gained about 16%.
The U.S. economy is showing signs of approaching the mid to late business cycle phase. Historically low unemployment numbers are now coupled with modestly rising wages. Strong retail sales numbers (which represent 70% of the U.S. economy) were also reported during the quarter. This lifts expectations for strong holiday sales this season. The National Retail Federation predicts holiday sales to increase 3.8% compared to 2.1% last year. The CPI (Consumer Price Index) rose only 0.10%, which is well below inflation levels. Crude oil closed the quarter near $53. Global growth continued to contract, especially in China. This data leads to a strong argument for another interest rate cut by year end.
The third quarter marked more volatility in the equities markets. Solid reports reaffirmed corporate earnings strength, and the volatility provided buying opportunities. Over time, stock pricing movement always realigns with earnings. Compared with the previous second quarter, there was not significant stock sector rotation. All sectors, except for energy and healthcare, have double digit returns year to date. This is also in line with mid to late stage business cycle momentum when, historically, some of the best returns are often realized.
While there has not been much change in the China trade deal, the global and weakening Chinese economy may force the Chinese government back to the table to renegotiate trade terms. Monies continue to flow into dividend paying equities and bond substitutes as investors search for attractive yields. The major economic indicators as a collective point toward continued expansion in the U.S., even if at a more modest pace. As the U.S. enters a presidential midterm election cycle, stocks have historically performed well. Staying the course with a well diversified, balanced portfolio should continue to provide attractive returns over the long run.