Third Quarter Market Review
“October: This is one of the peculiarly dangerous months to speculate in stocks. The other are July, January, September, April, November, May, March, June, December, August, and February.” ~ Mark Twain
Markets in the third quarter continued their upward momentum as solid earnings and macroeconomic data helped major indexes move quietly higher. Major benchmarks fought off fears arising from heightened tensions between North Korea and the US as well as the deleterious effects of multiple hurricanes. From a sector perspective, 10 of 11 S&P 500 sectors rose this quarter, led by energy as the price of oil increased on strong demand and slowing production growth. Despite the newsworthy headlines, this summer was relatively quiet as the “Wall Street Journal” reported the S&P 500’s average daily move of 0.30% was the lowest since 1968. International markets also delivered positive results this quarter as declining unemployment, rising consumer confidence, and greater manufacturing activity provided an environment for economic expansion.
Fixed income returns were largely positive despite interest rates and bond yields declining on lower inflation expectations, with the 10-year US Treasury bottoming at almost 2%. Janet Yellen’s commentary surrounding the absence of inflationary pressures, or in her words, the “mystery of inflation,” did not assuage markets but did reaffirm the likely continuation of easy monetary policy. As optimism for the US economy and the persistence of synchronized global reflation regained steam, the 10-year Treasury yield rose, ending the quarter where it started at 2.3%. The market has been anticipating a third rate increase this year, with December slated as the likely date for a rate hike. However, it remains to be seen who will ultimately be running the Fed, as Janet Yellen is not a lock to retain her position. Should a new Fed chief take a more hawkish view of the economic data, equity markets, as well as fixed income markets could experience volatility. Ultimately we believe interest rates will continue to move higher given positive labor, housing, and confidence indicators.
Looking forward, history has shown October to be a fairly volatile month for financial markets. Although markets are exhibiting near historic levels of low volatility, tides inevitably turn. The brilliant Mark Twain quote above is an assessment of financial markets that should resonate with all investors. At Madison, we don’t speculate in financial markets and believe diversified portfolios are the wise choice. As markets have ratcheted higher this year, the cost of avoiding risk has been extremely high. Well diversified portfolios have allowed our clients to participate in rising markets, while seeking to position those same portfolios to reduce downside risk for when the tides eventually turn.