Oct 25 2018
October 25, 2018

Third Quarter Observations

0 Comment

It is difficult to think back on the 3rd quarter when the 4th quarter is beating down the door. But here goes. 3rd quarter results continued the market’s concern that tariffs and a trade war, coupled with the FED’s move to raise interest rates would drag down revenues and profits. There was progress on negotiation of new trade deals with Mexico and Canada to replace NAFTA. Also, new deals were inked with South Korea, Japan and the Philippines. Not on that list was China, the real target.

3rd quarter GDP is expected to be 3% or better, indicating that the tariff tiff, while negatively affecting pieces of the economy, is not stalling the overall US economy. Unemployment is reaching record lows for different work groups and open jobs now outnumber the unemployed. Wages have also begun to inch upward but not at an inflationary rate. Employers are finding other ways to reward workers through bonuses and benefits.

The FED raised its interest rate by another .25% during the 3rd quarter and has stated the intent to do it again at the December meeting. While a rising interest rate is typically an indication that the economy is strengthening, the rising yield from bonds is taken as a direct threat by the market. The S&P’s annual dividend yield is now at 1.9%. The yield on the 10-year US treasury is now hovering around 3.20%. Speaking of the bond market, bond traders are still indicating a concern. A healthy spread between the 2-year and the 10-year treasury is 100 basis points. The spread remains under 30 basis points. If the economy has a good run ahead we should see the 10-year yield begin to move higher. That would put additional pressure on stocks. The FED has marched the economy into every recession and there is no reason to doubt they will do it again.

As we moved into the 4th quarter, October lived up to its reputation for market turbulence. Still, the US market remains the tallest midget in the room. The number 2 economy in the world, China, is bearing the full brunt of the trade war with the US. China’s GDP is in decline, their market is down 25% for the year and their debt bubble continues to expand as the government looks for ways to prop up the economy.

Looking ahead, the market will be buffeted by the November elections, geopolitical conflicts and most assuredly by the FED and its promise to raise rates into next year. But the 4th quarter is typically a positive one for the market. Commonly referred to as the Santa Clause Rally.