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Strong Economy Helped US Stocks in the Third Quarter

The third quarter of 2018 was the best-performing quarter for many stock markets this year. A strong U.S. economy, healthy corporate fundamentals and tax cuts powered stocks higher through multiple periods of trade, political, interest rate and international uncertainty.
Economic growth was the best in years. Second-quarter GDP growth exceeded 4% annually. The Atlanta Federal Reserve estimates near 4% GDP growth for the third quarter as well. The last time the U.S. economy posted two consecutive quarters of 4% GDP growth was 2014. Prior to that, it was 2004! 
More than 80% of S&P 500 companies reported earnings above consensus expectations, a record high. S&P 500 corporate earnings growth for 2018 is expected to increase 20% compared to 2017.
The third quarter of 2018 started with four areas of trade-related concerns: The EU, Mexico, Canada and China.  Concerns about the U.S./China trade relationship remain but there were important resolutions to other trade situations:
  • The United States and the European Union reached a trade agreement that should prevent retaliatory tariffs
  • The United States and Mexico agreed to a trade framework to replace NAFTA and
  • Canada and the United States reached an agreement for Canada to join the existing U.S./Mexico deal.
Third Quarter Performance Review
Major U.S. stock indices surged to all-time highs and there were broad gains across most market sectors. Large caps (stocks of large U.S. companies) outperformed small caps, a departure from the first two quarters of 2018. Growth stocks again outperformed value, as strong tech sector returns continued to help growth styles outperform, a consistent trend all year.
Internationally, the third quarter was the first positive quarter for developed foreign markets in 2018. However, foreign markets still lagged the U.S. market in the third quarter. Emerging markets declined.
The leading bond benchmark (Bloomberg Barclays US Aggregate Bond Index) was slightly positive in the third quarter, although it remains negative year-to-date (YTD). Continued strong economic growth, a reduction in political stress in the European Union and a September Fed rate hike were headwinds on the broad bond markets in the third quarter.
Finally, high-yield bonds returned a second consecutive quarter of positive performance as bond investors remained focused on strong corporate fundamentals and solid economic growth. High-yield bond performance remained positive on a year-to-date basis. 
The Future
Does this tell us anything about future returns? I don’t think so. One, five and ten year average returns are excellent but we are overdue for a major stock market decline. “Major “meaning 20% or more, a “Bear Market.”
According to historic averages, 20% or greater declines occurred approximately every 3.5 years. The last decline greater than 20% was during the Great Recession that ended in March 2009. So we are six years overdue. A Bear Market could happen sooner or later but investors need to be aware of the risk.
Volatility and stock market declines can be unnerving, even if they are historically typical. Historically, it was critical to stay invested, remain patient and stick to a plan. To help navigate this ever-changing market environment, focus on what you need to achieve long-term investment goals and then establish a personal allocation target based on your financial position, risk tolerance and investment time horizon.
Please contact me with any questions, comments or to schedule a portfolio review.
This is for educational purposes only. To learn more about the topics mentioned and if they are suitable for you, consult an appropriate professional. Tax laws can change at any time.
Any information provided in this presentation has been prepared from sources believed to be reliable, but is not guaranteed and is not a complete summary or statement of all available data necessary for making an investment decision. Any information provided is for information purposes only and does not constitute a recommendation.
Arthur Stein and Arthur Stein Financial, LLC are not authorized to give legal or tax advice.  For information on your specific situation, please consult your tax advisor regarding any tax implications and your attorney for legal implications. As required by the US Treasury Regulations, you should be aware that this presentation is not intended to be used and it cannot be used for the purposes of avoiding penalties under federal tax laws.
Keep in mind that:
  • Past performance is no guarantee of future performance;
  • Investments involve the risk of loss of principal and earnings;
  • ETFs, mutual funds, money market funds, etc. are not guaranteed by the US Government, the FDIC, a bank or anyone else.
  • “Average annual return” evens out variations in the actual year-to-year returns.
  • ETFs, mutual funds and individual stocks and bonds fluctuate in value and there will always be times when they lose value.
  • None of the information provided is necessarily relevant to anyone’s personal situation. Circumstances differ among individuals and you should not assume that these generalizations or information apply to you.
  • Investments mentioned may not be suitable for all investors.

Arthur Stein Financial, LLC ("ASF") is a registered investment advisor ("RIA"), located in the State of Maryland. ASF provides investment advisory and related services for clients nationally. ASF will maintain all applicable registration and licenses as required by the various states in which ASF conducts business, as applicable. ASF renders individualized responses to persons in a particular state only after complying with all regulatory requirements, or pursuant to an applicable state exemption or exclusion.

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