Market Pulse: Third quarter review (Opinion)
Is the market strong? Or is it going sideways? Well, yes… and yes.
For the third quarter, stocks were virtually flat, rising a token 1%. But for the nine months stocks are up 17%. Very strong.
Move the starting point and you’ll see a different picture. For example, over the past 13 months, stocks are unchanged, but start 18 months ago and the market would look very strong. More important than the picture in any time frame is the fact that selling has been limited.
It says a lot that stocks are doing well in the face of many headwinds (tariffs, tweets, trade, impeachment, slowing GDP growth, yield curve inversion, etc.). There are reasons it has.
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Tom Lee, the well respected market strategist, said the market always does well after the first interest rate cut, and we saw two cuts last quarter. Interest rates are falling everywhere in an effort to stimulate economies. Lee also cites the overwhelmingly negative sentiment among individual and professional investors.
I would add to his list the huge positive I’ve been mentioning for years. Compared to the low-yielding alternatives stocks are by far the most attractive asset class and they are becoming even more so as interest rates fall. Rising earnings will help, too. How much they rise depends on the economy.
The economy is mixed. Manufacturing is in a recession and overall growth is slowing, but it is still growth and the employment picture could hardly be better.
The unemployment rate declined to 3.5% in September, a 50-year low. Employee compensation rose 4.5% in 2017, 5% last year, and will be around 4% this year. That’s good because people care about after-tax income and their net worth, not bond yields and rate inversions.
The trade war is a headwind for the economy, both here and abroad. The Fed knows tariffs are a headwind and the economy is slowing, which is why they lowered rates twice last quarter. At the last meeting Chairman Powell indicated he does not see another cut this year or next, and sees an increase in 2021. Don’t count on that. I wouldn’t rule out a rate cut this month.
Stock valuations are near their five-year average and attractive relative to fixed income. Barring a trade deal it’s hard to imagine a big advance from here. Still, there is no reason for a big decline either.
Stocks are near their highs and I believe we’ll surpass them in the fourth quarter. Once again, dividends will play a large role in total returns.
David Vomund is an Incline Village-based fee-only money manager. Information is found at http://www.VomundInvestments.com or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial advisor before purchasing any security.
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