- Holding Steady. September – historically the worst month of the year – brought little in the way of stock market weakness. The year thus far has been marked by historically low volatility. Although there was plenty of news, including devastation from hurricanes and strained relations with North Korea, the markets mostly shrugged it off. With the global economy slowly chugging along, and corporate earnings remaining healthy, major stock indices produced modest gains for the third quarter.
- Economic Expansion. The U.S. entered into its longest period of economic expansion in the 90s, lasting exactly 10 years. We are currently in our 8th year of economic expansion, the second longest. The age of the ongoing expansion prompts questions of sustainability. We note that previous expansions typically do not die of old age. On the contrary, there is enough evidence to suggest that the global landscape is getting better. Economic momentum is becoming more comprehensive, from housing to consumption to manufacturing and services. Nearly all countries (94% globally) are generating positive year-over-year economic expansion, and more than half (61%) are experiencing growth acceleration.
- Central Banks. Against this positive economic backdrop, global central banks have indicated that they want to gradually reduce the level of monetary policy stimulus in place. We believe European Central Bank’s balance sheet growth will begin to slow, and the U.S. Federal Reserve’s will most likely shrink, albeit at a glacial pace. Though, as noted, expansions typically do not die of old age, the Federal Reserve policy has frequently been a counter-cyclical force.
- Tax Reform President Trump proposed a sweeping tax reform that will broadly cut taxes, especially for corporations, in an effort to stimulate higher GDP growth. The plan right now is heavy on concepts but short on details, but as with any legislative reform, there will be winners and losers as the deal is negotiated in Congress. The impasse in Washington may have led many investors, us included, to be skeptical on the prospects for a major tax overhaul. However, we recognize that even a modest change in the status quo could be positive for equities.
- Reasons for Optimism. The resiliency of stocks continues, but risks of a pullback exist with signs of investor complacency and heightened political and geopolitical uncertainties. However, it is the health of the economy that shapes long-term trends. Absent a shift in macro drivers, we think global markets can grind higher, supported by growth trends forming overseas, and with low interest rates everywhere. Valuations are on the higher side, but we believe they can be sustained, and even climb further, especially if corporate profits and earnings continue to rise.