The third quarter was stellar for stocks. Despite the imposition of tariffs on China, increasing election uncertainty and a number of trade issues, stocks continue to march forward. There are clearly some changes in leadership in recent weeks as the S&P 500 outperformed the NASDAQ for the first time in a while. The FAANG stocks (Facebook, Amazon, Apple, Netflix and Google) lost some leadership. Small stocks generally outperformed this quarter and the United States stock market outperformed most other foreign stock markets.
The current fear that rising interest rates can kill this market has increased volatility as we begin the fourth quarter. Bank stocks have begun to perform somewhat better in anticipation of higher rates. The rest of the market outside of financials remains afraid that Federal Reserve Chairman, Jerome Powell, is too hawkish and will raise rates too high and too quickly. This, in my opinion, remains the greatest known risk to the market as I favor a lighter touch, especially as there are some early tenuous signs in home pricing in the largest markets.
There are other reasons why continued rate increase could hurt the economy. If we really believe that income inequality is an issue, then it seems unfortunate to raise rates aggressively at the first sign of wage growth in years over 2%. Amazon, Walmart, and other large employers are raising lower-end wages in part as a result of the corporate tax reductions of the tax bill passed earlier this year. It seems to me that it would be far better to let the economy run for a bit and tighten faster later than it would be to have to restart an economy that was slowed by a too aggressive monetary policy.
I do believe that the sloppiness can continue for a bit as uncertainty about tariffs and the elections continue. However, corporate earnings should continue to be excellent and I suspect they will continue to support equities through year-end.
As always, we are here for each of you during these volatile times.