Every Quarter, Jerry Chafkin the Chief Investment Officer of our partner at Assetmark writes an excellent re-cap of what happened in the markets over the past quarter. This quarter is no different.
Here is his overview of the markets for the third quarter of 2017.
Third Quarter Overview
1. US stocks returned 4.5% in the third quarter of 2017 which, when added to their 9.4% return for the first half of 2017, brings their year-to-date return to 14.2%1 . The economy continued to strengthen, earnings continued to grow, and investor sentiment remained positive.
2. Realized volatility for the stock market during the quarter remained low, which suggests that the market is efficiently pricing individual stocks relative to one another. Low realized volatility is also encouraging because it tends to persist, providing a high probability that volatility in the near future will remain low.
3. Stock valuations as a function of forecasted earnings continue to be higher than their historical average, but can be rationalized given low interest rates and where we are in the economic cycle. In addition, other valuation metrics such as price-to-book comparisons and dividend yield suggest that market valuations may still have room to rise.
4. Bonds provided positive returns during the quarter despite the Fed’s bias to a tighter monetary policy. The Fed spelled out a plan for a very gradual and transparent unwinding of its quantitative easing in order to minimize uncertainty for the market. So far, the strategy seems to be working given that the market continued to rise within a few days of the announcement. The Fed also set expectations for a rate increase at year-end followed by three more in 2018. This is not priced into the market, suggesting bond investors are skeptical. This leaves room for bond prices to drop if investor expectations prove wrong.
5. Global diversification benefited US investors during the quarter thanks to the combination of a global economic expansion and the third quarter’s continued weakening of the US dollar, as it did in the prior two quarters of 2017. International stocks returned 21.6%2 year to date for US investors versus the 14.2%1 return on US stocks.
If you would like read the entire 3rd quarter report, click here.