Q3 2017 Quarter End ReportSubmitted by Kaizen Financial Advisors, LLC on October 17th, 2017
THE QUARTER IN BRIEF
Encouraging economic data and a series of unsettling news headlines vied for Wall Street’s attention in the third quarter, and ultimately, investors were not shaken. The S&P 500 rose 3.96% over three months, getting a lift from upbeat manufacturing and consumer confidence readings as well as earnings news. Away from our shores, the economies of China and the euro area showed improvement, and foreign stock benchmarks rallied along with ours. A slumping dollar offered no big spark for the commodities markets. The residential real estate market looked to be cooling off. The quarter was filled with major news stories, yet the bulls sauntered through the disruptions.1
Let’s take a closer look. For those of you visually oriented, here’s a summary graph, followed by the specific details.
* Note that S&P 500, Russell 2000, Dow Jones Global World Real Estate, S&P GSCI, and Barclays US Aggregate Bond indices are reported in total return (TR), which includes all dividends reinvested, while MSCI EAFE and MSCI EAFE Emerging Markets are reported in price index (PR), which does not include dividends.
U.S. Index Performance
National markets, as measured by the S&P 500 and the Russell 2000 indices:
- The S&P 500 index posted a gain of 4.48% for the quarter and is up 14.24% year-to-date.
- The Russell 2000 Small-Cap index is up 5.67% for the quarter and up 10.94% year-to-date.
Meanwhile, in the global market:
- The broad-based EAFE index of companies in developed foreign economies gained 5.40% in dollar terms in this quarter, and shows a gain of 19.96% for the year so far.
- Emerging markets stocks of less developed countries, as represented by the EAFE EM index, gained 7.89 % for the quarter and remains up 27.78% for 2017.
Looking over the other investment categories:
- Dow Jones Global World Real Estate index rose 3.19% for the quarter, giving a total year-to-date gain of 12.41%.
- Commodities, as measured by the S&P GSCI index, gained 7.22% this quarter, but remain down 3.76% year-to-date.
- The Barclays US Aggregate Bond index is up 3.14% for the year. Meanwhile, 30-year Treasuries are yielding 2.86%, up from 2.32% at this time last year, and 10-year Treasuries currently yield 2.33%, up from 1.60% at this time last year.
DOMESTIC ECONOMIC HEALTH
Consumer confidence barometers were among the most impressive economic indicators last quarter. By August, the Conference Board’s index topped 120, far above its origin score of 100; it was at 119.8 in September. The University of Michigan’s consumer sentiment gauge ended Q3 exactly where it ended Q2 – at a solid mark of 95.1, rebounding from a July dip to 93.4.2,3
The economy’s two key purchasing manager indices were also elevated well above the 50 level, which also cheered Wall Street. In September, the Institute for Supply Management’s factory PMI jumped to 60.8 – rising above 60 for the first time in 13 years, after readings of 58.8 in August and 56.3 for July. ISM’s service sector PMI came in at 53.9 for July and 55.3 for August (at this writing, the September reading was pending).4,5
Hiring eased during the quarter. Employers added 156,000 net new jobs in August after a July gain of 189,000. The main jobless rate ticked up from 4.3% in July to 4.4% in August, while the U-6 rate, tracking unemployment and underemployment, held at 8.6%.6,7
Inflation showed definite signs of picking up, or at least, nearing the Federal Reserve’s 2.0% target. The Consumer Price Index showed a 12-month advance of 1.7% in July, then 1.9% in August. In both those months, core prices rose 1.7% year-over-year. The Producer Price Index displayed but a 1.9% yearly advance in July, which rose to 2.4% a month later.2
With personal wages improving annually at a decent 2.5%, did personal spending increase? Not as much as economists hoped. The gain was 0.3% in July, but merely 0.1% in August.7,8
Other data points from Q3 included a minor retreat for manufacturing production (down 0.1% in July and 0.3% in August), a rise and fall for industrial production (up 0.4% for July, down 0.9% just a month later), and a fall and rise in durable goods orders (which sank 6.8% in July but rose 1.7% for August). Retail sales were 0.3% higher in July and declined by 0.2% for August.2,8
Few investors thought the Federal Reserve would tinker with interest rates in the third quarter, and it did not. It did announce a strategy to cut its $4.2 trillion balance sheet at its September policy meeting. Beginning in Q4, the Fed will allow $10 billion in bonds per month to run off, and the pace will accelerate to $20 billion per month in Q1, $30 billion per month in Q2, etc., to a monthly goal of $50 billion.9
Cybercrimes were also conspicuous in the quarter. Credit reporting titan Equifax had its databases hacked, leaving the personal information of more than 140 million Americans at risk. Whole Foods and Sonic also suffered major identity theft breaches.10
GLOBAL ECONOMIC HEALTH
News about the European economy was increasingly positive, even as Spain’s Catalonia region threatened to secede and Brexit negotiations continued. By August, euro area joblessness had fallen to 9.1%, an 8-year low; unemployment was down to a record-low 5.6% in Germany. Euro area consumer confidence rose to a high unseen since prior to the credit crisis, as the summer ended. In September, the European Central Bank forecast growth of 2.2% for the region, which could lead the ECB to wind down its longstanding bond-buying effort.11
Late in the quarter, China’s official statistics bureau projected 6.9% GDP for the year; Nomura, JPMorgan Chase, and Citibank upgraded their forecasts for China’s 2017 growth to 6.8%. When it came to India, the outlook was far less rosy; as Q3 ended, the Asian Development Bank cut its GDP forecast for India’s current fiscal year by 0.4% to 7.0%, and Fitch Ratings slashed theirs by 0.5% to 6.9%. Particularly alarming was news that the Indian manufacturing sector had advanced only 1.2% year-over-year through July.12,13
As September’s final trading day ended, 13-week (quarterly) gains were widespread among foreign benchmarks. The MSCI Emerging Markets index surged 7.02% in Q3. Not far behind was the Hang Seng; Hong Kong’s index soared 6.95%. The Shanghai Composite rose 4.90%. MSCI’s World Index posted an advance of 4.39%.14,15
Quarterly improvements also occurred for the CAC 40 in France, which added 4.08%, and the DAX in Germany, up 4.09%. Canada’s TSX Composite rose 2.98%; Japan’s Nikkei 225, 1.61%; India’s Sensex, 1.45%. The United Kingdom’s FTSE 100 gained 0.82%. Australia’s All Ordinaries was an exception, putting up a Q3 loss of 1.11%.15
The U.S. Dollar Index weakened by another 2.66% in the third quarter, yet the broad raw materials market did not rally strongly in response; although, select futures did. Heating oil made the biggest advance among notable commodities, rising 21.9%. Elsewhere on the NYMEX, oil added 12.2%, closing at $51.64 on September 29.16,17
Gold fell after hitting a YTD peak in the quarter, but ended Q3 at $1,284.80, its lowest close in more than a month. The yellow metal rose 3.4% in Q3. Silver prices increased only 0.3% to $16.68 across the quarter. Platinum went up 1.2%; palladium, 12.0%. Amid the base metals, zinc gained 15.0%; aluminum, 11.4%; copper, 9.2%. Cocoa stood out from most other crops with a 7.4% advance. Wheat lost 12.3%; cotton, 8.3%; corn, 4.1%. Natural gas ended up losing just 0.86% in three months.16,18
Prospective home buyers looked around and saw fewer homes on the market in the third quarter, along with fewer homes they could actually afford. According to the National Association of Realtors, the median existing home sale price in August was $253,000. The latest available edition of the 20-city S&P/Case-Shiller home price index (July) showed prices advancing 5.9% annually.8,19
By August, the NAR reported that existing home sales had declined in four of the last five months. They were down 1.3% in July and another 1.7% a month later, with the sales pace reaching a 12-month low. The Census Bureau’s picture of new home buying was no better: a 5.5% stumble for new residential sales in July, a 3.4% dip in August.2,19
Pending home sales also trended downward, falling 2.6% in August after a mild descent of 0.8% for July. Groundbreaking also lessened during the quarter. The Census Bureau identified a 2.2% reduction in housing starts for July, lessening to 0.8% in August. Building permits did rise 5.7% in the eighth month of the year after falling 4.1% during the seventh.2,8
Between June 29 and September 28, fixed-rate home loans grew slightly more expensive, according to Freddie Mac’s Primary Mortgage Market Survey. On September 28, the survey showed the following interest rates: 30-year fixed, 3.83%; 15-year fixed, 3.13%; 5/1-year adjustable, 3.20%. The numbers from the June 29 snapshot: 30-year fixed, 3.88%; 15-year fixed, 3.17%; 5/1-year adjustable, 3.17%.20
LOOKING BACK…LOOKING FORWARD
Looking back - Many investors think of the fourth quarter as a "sweet spot" for the market, and they can cite history to affirm their belief. Since 1950, the S&P 500 has advanced in 79% of fourth quarters. The average Q4 performance from 1950-2016 is 3.9% and if the U.S. charts a prudent economic course, it’s possible that the current expansion could at least set new records for longevity. This current expansion just turned 99 months old. The all-time record is 120 months, from 1991 to 2001.
Looking forward - there are potential speed-bumps down the road. There are uncertainties around government policy and fundamental economic issues that could spook investors, and if those weren’t scary enough, there’s the nuclear sabre rattling sound coming from North Korea. Hurricanes have disrupted economic activity in Houston and large swaths of Florida, while Puerto Rico lies in ruins. The Trump Administration has threatened multiple trade wars with America’s major trading partners: the NAFTA members Canada and Mexico, and with China and tight immigration rules could lead to limited labor supplies.
What we have learned as long term investors and what we reiterate to you our clients is that no one can predict the market with 100% certainty and the most prudent advice, in good markets and in bad, is to keep your money invested and diversified. If there are any short term cash needs set that money aside in your safety bucket and ride out the ups and downs.
So in short, stay the course and partner with your advisor. Together we will weather the storms and navigate the best path, and with a steadfast proven approach, you will reach your financial goals.
1 - quotes.wsj.com/index/SPX [10/2/17]
2 - investing.com/economic-calendar/ [10/1/17]
3 - tradingeconomics.com/united-states/consumer-confidence [10/2/17]
4 - investors.com/news/economy/ism-manufacturing-index-jumps-to-highest-since-2004/ [6/2/17]
5 - instituteforsupplymanagement.org/ISMReport/NonMfgROB.cfm [9/6/17]
6 - ncsl.org/research/labor-and-employment/national-employment-monthly-update.aspx [9/1/17]
7 - foxbusiness.com/markets/2017/09/01/us-hiring-cools-off-with-156000-new-jobs-in-august.html [9/1/17]
8 - marketwatch.com/economy-politics/calendars/economic [10/1/17]
9 - nytimes.com/2017/09/20/business/economy/fed-bond-buying.html [9/20/17]
10 - tinyurl.com/y7j6nw9f [9/29/17]
11 - bloomberg.com/news/articles/2017-10-02/euro-area-s-danger-year-morphs-into-burst-of-economic-optimism [10/2/17]
12 - globaltimes.cn/content/1068988.shtml [7/3/17]
13 - financialexpress.com/economy/fitch-lowers-indias-growth-forecast-to-6-9/879410/ [10/2/17]
14 - msci.com/end-of-day-data-search [10/2/17]
15 - news.morningstar.com/index/indexReturn.html [10/2/17]
16 - seekingalpha.com/article/4110889-commodities-3rd-quarter-overview-outlook-q4 [10/2/17]
17 - money.cnn.com/data/commodities/ [9/29/17]
18 - coinnews.net/2017/09/29/gold-silver-rise-in-3rd-quarter-us-mint-bullion-sales-mixed-in-september/ [9/29/17]
19 - marketwatch.com/story/existing-home-sales-fall-in-august-for-the-fourth-time-in-five-months-2017-09-20 [9/20/17]
20 - freddiemac.com/pmms/archive.html?year=2017 [10/1/17]
21 - markets.wsj.com/us [9/29/17]
22 - bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=9%2F29%2F16&x=0&y=0 [9/29/17]
22 - bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=9%2F29%2F16&x=0&y=0 [9/29/17]
22 - bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=9%2F29%2F16&x=0&y=0 [9/29/17]
22 - bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=9%2F28%2F07&x=0&y=0 [9/29/17]
22 - bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=9%2F28%2F07&x=0&y=0 [9/29/17]
22 - bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=9%2F28%2F07&x=0&y=0 [9/29/17]
23 - treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyieldAll [10/2/17]
24 - foxbusiness.com/features/2017/10/01/market-snapshot-will-stock-market-live-up-to-4th-quarters-reputation-for-strength.html [10/1/17]