With the important 4th quarter ahead of us, it’s time to check the rearview and see what transpired last quarter to get us where we are. Most markets trended up for the quarter, and there were no major geopolitical drivers for under- or out-performance. There are still a slew of worries surrounding global markets such as conflict in the Middle East, North Korea’s nuclear tests, weakness in banking in Europe (highlighted by recent trouble from Duetsche Bank, one of Germany’s largest banks), oil price stability, slowing growth, and elections in the United States. The growing trend of populism and protection from trade has also been on the rise and may potentially have a chilling effect on the global economy. The markets seem to be getting used to unconventional Central Bank policy. The Bank of Japan is leading the charge to this uncharted territory, with unprecedented buying of Equity and Fixed Income securities, negative interest rates, and now a focus on the yield curve to help prop up financial institutions.
The US Federal Reserve held off on any interest rate increases in September, and the market thinks December is the most likely time to see an increase. Job gains were steady for most of the Q3, while the unemployment rate barely budged. The job gains have not translated into sustained wage growth, or the inflation that the U.S. Federal Reserve is looking for.
In the U.S. equity markets, the Dow Jones Industrial Average ended the quarter up 2.78%. The S&P 500 index returned 3.85%, while foreign developed markets rebounded from the previous quarter to return 6.43%, as represented by the MSCI EAFE index. Emerging markets added 9.03% in the quarter, based on the MSCI EM index. All around a decent quarter to own equities, but discussions of excess in the market are becoming more frequent as most of the U.S. indexes are near all-time highs. The continued decline in earnings from S&P 500 companies is compounding the discussion of excess or “froth” in the market.
In the Fixed Income universe, the Barclays US Agg was slightly positive for Q3, at 0.46%, with the intermediate version behind at 0.31%. The Barclays Government index was down slightly at -0.25%, while the Barclays US Corp Investment Grade was up 1.41%. In the High Yield, the Barclays US Corp. High Yield index was up 5.55% for the quarter. Looking back it seems investors could do no wrong in the quarter, with most major U.S. indexes being positive. However, there were some bumps, bruises, and uncertainties along the way.
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Source: Index returns as of 9/30/16, Morningstar.com
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