Current Thinking

3rd Quarter 2018 Economic & Market Review

Economy and the Federal Reserve
Global economic growth continued at a steady rate. U.S. GDP came in at a 4.2% annualized rate for 2Q (information reported in Q32018). This reading was as expected for the quarter and above the 3.0% annualized rate for the same quarter last year. As reported last quarter, the economy is in its 9th year of its expansion, the 3rd longest on record. The employment picture has remained strong in Q32018 with the unemployment rate at 3.9%, near its cyclical low of 3.8%. The housing market moderated, as year-over-year home sales were flat to slightly positive, while year-over-year home price increases slowed to less than a 6% growth rate. The Federal Reserve (the “Fed”), in September, raised the federal funds rate target by 25 basis points to a range of 2.00% – 2.25%. Market expectations are for one additional increase in 2018 (four total for the year).

Equity Markets
Global equities continued their recovery in most markets in the 3Q of 2018. After recovering in the second quarter of 2018, US equities advanced into record territory in the third quarter. Domestically, the S&P 500 Index, representing large-cap stocks, returned +7.7% in Q32018, following a +3.4% gain in Q22018
(10.6% year-to-date, “YTD”). After underperforming last quarter, large-cap stocks outperformed their small-cap counterparts for the third quarter as the Russell 2000 Index returned +3.6% (11.5% YTD). Meanwhile, the Russell Midcap Index returned 5.0% for the quarter (7.5% YTD). Growth continued to outperform value across the capitalization spectrum for the 3rd quarter of 2018 on the heels of outperforming across all capitalization sizes by historical margins in 2017. For the quarter, Health Care, Industrials and Telecommunications were the strongest performers, generating gains of +14.5%, +10.0% and +9.9%, respectively. The Materials, Energy and Utilities sectors were the poorest relative performers, posting returns of +0.4%, +0.6%, and +2.4% respectively. Emerging Markets stocks continued in negative territory, returning -1.0% in 3Q2018 (-7.7% YTD). The MSCI EAFE Index (representative of developed non-U.S. equity markets) performed slightly better in the third quarter, returning +1.4% (-1.4% YTD).

Fixed-Income Markets
US interest rates continued to slowly rise while remaining low by historical standards. Interest rates rose for short-term U.S. Treasury securities in the third quarter of 2018, in concert with the Fed’s interest rate hikes in June and September. The yield on the 10-year U.S. Treasury note also rose, but by a smaller amount than short-term yields, which reinforced the market’s concern over a flattening yield curve. The yield on the 3-month U.S. Treasury bill increased to 2.19% by quarter-end, up 26 basis points from prior quarter-end, while the 10-year U.S. Treasury note yield ended the third quarter of 2018 at 3.05% vs. 2.85% on 6/30/18. For the third quarter, the Bloomberg Barclays U.S. Aggregate Bond Index (representing investment grade U.S. bonds) was flat (-1.6% YTD); the Bloomberg Barclays Long Credit Index was up +1.3% (-5.2% YTD) and the Bloomberg Barclays U.S. Aggregate Corporate High Yield Index returned +2.4% (+2.6% YTD).