While the temperature outside cools as we move into the fall and winter seasons, stock markets remain red hot. Despite three of the most powerful hurricanes to ever hit the U.S., political divisiveness in Washington, and threats from North Korea, U.S. stocks rose another 4.5% in the third quarter, bringing year-to-date returns on the S&P 500 Index to an impressive 14.2%. International equity markets fared even better, with the MSCI EAFE Index up 5.4% for the past three months, boosting 2017 returns to 19.9%. Despite overall market strength, small company stocks lagged for most of the year. That changed in September when the Russell 2000 Index surged +6.2%, bringing its year to date return to +10.9%.
Positive economic data continues to underpin the rise in equity markets. The U.S. economy grew at an annual rate of 3.1% in the second quarter, the highest growth rate in more than two years. While the aftermath of Hurricanes Harvey, Irma, and Maria is expected to temporarily dampen the pace of growth this quarter, the U.S. economic outlook remains bright.
Valuation is not a Catalyst
Nine years into a bull market run, it’s easy to understand why some people believe that stocks might be running out of gas. Although equity prices are at the higher-end of historical valuations, economic data remains healthy and is expected to strengthen into the first half of 2018. Supplement this with a muted inflationary environment and you have a set of conditions that are historically positive for stocks. We maintain that while valuations do matter, elevated valuation alone is not a catalyst for a market selloff. Instead of trying to call a market top based solely on one factor like valuations, we constantly map and measure economic data and then respond accordingly to what’s observed.
Economic data continues to confirm a stable growth environment, which on average is positive for stock market returns. Our outlook and risk model signal a high probability of this trend persevering into 2018.
How Can We Help?
At GGM, aligning your investments with the prevailing economic environment is just one of the ways we strive to add value to your portfolio. If you are concerned about whether your investments are primed for the current market and allocated to meet your objectives, we recommend our complimentary portfolio checkup. Contact us today!