- Q3 Overview. It was generally a positive quarter for markets as they recovered from the initial shock of the late-June U.K. referendum vote to leave the European Union. Volatility across equities and fixed income were markedly lower compared to recent quarters, as lower bond yields and ample global liquidity soothed investor concerns.
- Shifting Monetary Policies. The Fed came close to raising short-term interest rates at the September meeting, but elected to wait for continuing evidence of a stronger economy. Fed decisions will remain data-dependent, but a December move to hike is looking more likely than not. Meanwhile, central banks in Europe and Japan opted not to reduce policy rates further amid signs of the detrimental real-world impact of negative rates.
- Earnings: The Lifeblood of the Market. Current Q3 earnings expectations are projecting a decline of -2.1%, marking the sixth consecutive quarter of year-over-year earnings declines. However, there is rising optimism that we will see an end to the earnings recession, as reported earnings typically come in above earlier estimates. Forward earnings for the year-end are beginning to tick higher, too. Significant headwinds persist in the energy sector, however, in the form of a stronger USD.
- Business versus Consumer Spending. Soft trends persist in business fixed investment worldwide, with manufacturing in particular stuttering of late. Consumer fundamentals, though, remain positive. Job growth remains healthy, and is accompanied by moderate wage increases and low gasoline prices. With consumers representing 70% of the economy, odds of a recession remain low.
- Presidential Election Heating Up. The unprecedented 2016 election has the potential to feed market choppiness in the short-term. As the GOP defections from Donald Trump gain momentum, Hillary Clinton has gone from being a shaky favorite to a firm one. Recent poll shifts are raising the potential for a complete Democratic sweep, flipping the Senate and the House back to the Democrats. The situation remains volatile, and we think further “October Surprises” await the public.
- (Still) Cautiously Optimistic. As we approach the seasonally bullish final months of the year, the intermediate outlook for the market appears mildly encouraging. We believe earnings may have troughed, setting a stage for higher stock prices supported by stronger profits. Valuation, though no longer cheap, is not wildly expensive either, given such low interest rates competing as an alternative, even as the stage is set for the Fed to hike rates a second time this December.