Third Quarter 2018 Market Update
October 12, 2018
The S&P 500 soared 7.2% during the third quarter, the best quarter since Q4 2013. These solid gains occurred due to strong earnings reports, with S&P 500 companies reporting a second consecutive quarter of 25% earnings increase. The markets were able to ignore the back and forth media attacks between China and the United States, as trade war tariffs escalated.
The third quarter market performance pushed the S&P 500 up 8.99% for the year, with large-cap growth having the top performance of the Morningstar nine-square grid Style Box (large, mid, small / value, blend, and growth). The Polaris Greystone strategies have fared very well given that the Russell 1000 Value Index, our nearest benchmark, is only up 4.36% for the year.
Mid-Term Election & the Markets
Often I am asked about my personal political beliefs, to which I answer: “When it comes to my job it is important to me to be agnostic about politics. It is my job to properly understand the impact that politics might have on the markets and invest accordingly.” I truly believe in my statement. While I have my own beliefs, Polaris Greystone represents over 1,600 clients who represent the entire bell curve of their own beliefs. My job is to understand how politics influence the markets and to position our portfolios in the best way possible to take advantage of how politics might affect different segments of the market. In other words, my personal beliefs have no business at my place of business.
Mid-term election years have historically been the worst performing of the four-year presidential cycle. The chart below is a culmination of price movement in the Dow Jones Industrial Average from 1900 through 2017. This, by no means, is meant to be a prediction for the year, but rather a guideline to show how the markets have reacted during a mid-term election year. Historically, the first few months of the year have performed well, followed by weakness going into the mid-term election.As uncertainty wains, the Dow Jones picks up strength and finishes the year off strong.
The graph below reiterates the point made in the prior chart. The S&P 500’s worst two quarters during the four-year presidential cycle are the two quarters preceding a mid-term election. Again, once the uncertainty of the election has subsided, the markets have historically had a very strong performance.
Right now, we have a Republican President and a Republican Congress. Historically speaking, this has happened about 25% of the time and produced a 7.69% gain per annum. Come November 6th we will find out if there has been any shift in control of Congress. Below, we have provided the returns of the Dow Jones Industrial Average while looking at who is in control of our government.
What Happens From Here?
We remain very bullish about the markets over the next 12 months. Here is why we think that the markets will go higher from here:
- Earning expectations for the next four quarters remains very strong.
- S&P 500 companies reported record share buybacks.
- Our economy is growing faster than it has for years.
- There remains above average earning growth.
- The U.S. dollar remains trade ranged, posing no threat to trade.
- The U.S. still has a trade imbalance. From a historical perspective this imbalance is as low as it has been since the late 90s.
- Our secular bull market is well intact.
Major Risk In Bonds
We’ve been discussing this for several quarters, and now it seems to be taking hold. A rising interest rate environment is not favorable for bonds, especially for intermediate and long-term bonds. We have shown the chart below in several prior educational emails. We have seen a 2% uptick in Fed Fund rates. So far, we have not seen the full brunt of these hikes impact bonds to its full extent, primarily due to international investors buying U.S. fixed income. This year we’ve begun to feel the impacts of the Fed’s actions. We see continued risk in intermediate and long-term bonds for the foreseeable future.
What Polaris Greystone Is Doing?
As I write this, our technical research points to a strong market. Our macroeconomics look good. Most fundamental research looks good. The sentiment looks a little frothy, but not out of the spectrum of normal. As a result, we remain bullish going into the fourth quarter.
APolaris Greystone manages money in a clinical, tactical manner. If any of our four pillars were to shift, we would get more defensive with all of our investment strategies, including your portfolio. This should hopefully give you confidence that if risk changes, so will your portfolio allocation. Please read the article we wrote two months ago, Bull Markets Climb a Wall of Worry. It will help you understand how bull markets operate and will hopefully give you comfort.
As always, I welcome your questions and comments, and I encourage you to meet with your Polaris Greystone wealth advisor to keep up to date with our service offering.
Jeffrey J. Powell
Managing Partner, Chief Investment Officer
Polaris Greystone Financial Group, LLC is a federally registered investment adviser. The information, statements and opinions expressed in this material are provided for general information only, are based on data we believe to be accurate at the time of writing, and are subject to change without notice. This material does not take into account your particular investment objectives, financial situation or needs, is not intended as a recommendation to purchase or sell any security, and is not intended as individual or specific advice. Investing involves risk and possible loss of principal capital. Diversification does not ensure a profit or protect against a loss. Advisory services are only offered to clients or prospective clients where Polaris Greystone Financial Group, LLC and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Polaris Greystone Financial Group, LLC unless a client service agreement is in place.