In this latest installment of our quarterly report, my colleagues and I share some observations on the third quarter, discuss the potential impact of the upcoming election, and also offer our broader outlook for the economy and markets. Click here to go to the full report on our website. Following are a few highlights:
- We are watching the Presidential race closely but do not believe the upcoming election will have a significant long-term impact on the markets. Other factors more directly and fundamentally influence investment returns, and markets have done well through many different political environments.
- We agree with the market consensus that the Fed will probably raise rates in December, unless economic data changes significantly. Any increase would likely be 1/4%, enough to signal the Fed’s willingness to act to control inflation but not enough, in our opinion, to derail economic growth. Though it should not surprise anyone, this change could temporarily rattle markets.
- U.S. economic growth rose to 1.4% in the second quarter, and it appears that growth should pick up further in the second half of 2016. GDP is increasing more slowly than last year, but we believe the near-term odds of a U.S. recession are still slight. Elsewhere in the world, the economic picture is mixed but, in our view, positive overall, and central bankers are currently maintaining their stimulative policies.
- The third quarter saw a reversal of many trends from the first half of the year. For example, technology and financial stocks went from lagging in the first half to outperforming in the third quarter. Meanwhile, several defensive asset classes that performed well in the first half reversed course due to more positive economic data and increased odds of an interest rate hike by the Fed. Also, U.S. stocks outperformed in the first half but lagged foreign stocks in the third quarter. Since it is nearly impossible to predict all of these short-term changes in sentiment, we believe these shifts emphasize the importance of a well-diversified, global portfolio.
- Corporate earnings for the third quarter will likely be flat or down slightly, so they will not provide much lift to the broad market until they pick up meaningfully from current levels.
- Particularly encouraging is the recent performance of value stocks, which are beating growth stocks for the first time in several years.
- With a rate hike likely in December and interest rates still at historically low levels, we continue to favor other income classes over most bonds.
Jordan Smyth and the Edgemoor Investment Advisors Team