“The lark’s on the wing; The snail’s on the thorn; God’s in His heaven— All’s right with the world!” from Pippa Passes, by Robert Browning.
Financial markets continued their seemingly inexorable march forward in the third quarter despite a raft of worrisome news ranging from the ongoing political turmoil emanating from Washington D.C. to the devastating impact of three large hurricanes making landfall on the U.S. mainland and Puerto Rico. Much like the titular character in Robert Browning’s poem Pippa Passes, market participants seem to see all that is right with the world, and when confronted with unpleasant realities they, like Pippa, construct a narrative more palatable to their optimistic worldview. Thus far this year financial markets have focused on economic growth, both in the U.S. and across the globe. In its most recent release, the Bureau of Economic Analysis estimated second quarter U.S. GDP growth at 3.0%. The IMF’s latest estimates of global GDP growth came in slightly higher at 3.5%. A quiet corporate earnings season and slightly rising oil prices seemed to have positive effect on market sentiment.
Across the board, stocks posted healthy gains in the quarter, ignoring the noisy news cycle and taking comfort in the sanguine economic conditions. The S&P 500 was up 4.48% for the quarter and is now up 14.24% year-to-date. Global stock markets posted even better results. International stocks, as measured by the MSCI-EAFE Index, rose 5.40% in the third quarter and are up 19.96% so far this year. The best results so far this year have been posted by emerging market stocks. The MSCI-EM Index was up 7.89% in the quarter and 27.78% for the year. Bonds have not missed out on this party. The Barclay’s 5-Year Municipal Bond Index rose 0.85% in the quarter and is now up 3.87% for the year. The broader Barclay’s Aggregate Bond Index was up 0.68% in the quarter and is up 3.14% thus far in 2017.
Maybe the most remarkable aspect of this year’s financial market results has been the extreme lack of volatility in U.S. equity markets. Per Charles Schwab, thus far this year we have only seen 5% of trading days with a move in the S&P 500 of +/- 1%, which is the lowest level since intra-day data began to be recorded in 1982. To further emphasize the point, there have been no days of +/- 2% moves in the S&P 500 this year, the first time that has happened in twelve years. The longest streak of positive calendar year returns in the S&P 500 occurred during the great bull market of the 1990’s when the S&P 500 had 9 consecutive years of positive annual returns, from 1991 through 1999. The second longest such stretch occurred from 1982 to 1989 when the S&P 500 posted annual gains for 8 years. Should the S&P 500 end the year in positive territory it would mark the ninth consecutive year of positive annual returns, matching the bull market of the 1990’s as the longest such streak.
Looking forward we will be carefully watching the Federal Reserve as they begin to unwind the policy of Quantitative Easing by allowing some of the bonds currently residing on the Fed’s balance sheet to mature without reinvestment. In addition, the Fed’s guidance continues to indicate another increase in interest rates toward the end of this year and an additional three increases in 2018. Finally, Fed Chairman Janet Yellen’s term expires in February of 2018, and the announcement of her successor, and any shift in Fed policy that may indicate, will be closely followed by market participants.