2017 Quarterly Investment Commentary: “Third Quarter Huddle”

October 2, 2017

By: John Cox, CFA, CAIA

As we enter the fall season and the leaves begin to change colors, college and professional football captures the attention of many. Some might consider football to be worlds apart from investing. However, they are more similar than you might think. Coaches talk about the fundamentals of blocking and tackling, and in the investing world, this principle translates to the discipline of saving in both good and bad times. Resist the temptation to panic when things get a little tense, as they will in both investing and football — just continue to “move the ball down the field,” making positive yards and first downs. Speculative investments can occasionally pay off, in the same way that a “Hail Mary” pass might, but most of the time, they do not. Patience is definitely a virtue when it comes to investing, and setbacks will inevitably occur, just as penalties are sometimes as unavoidable as the dreaded quarterback sack. Investors and football players must be resilient.

While investment markets can be volatile, the key is to focus on long-term goals, such as retirement or other important life events, even though those goals may seem far away. Imagine the team that starts on its own 20-yard line and methodically moves down the field. Every play cannot be executed perfectly, but the objective of reaching the end zone is always at the forefront. Most investors have time on their side and should let the power of compounding investment returns year after year work for them. You may not be able to control the investing environment, just as a football team cannot predict its opponent’s playbook, but you can control how much you save, the way your assets are allocated and your discipline to stay invested, even when it is difficult to do so.

The trends of market performance in the last quarter of 2016 have continued throughout the first nine months of 2017. Even though there has been turmoil in Washington, terrorist threats from North Korea, three major hurricanes and a credit reporting agency breach involving 143 million people, global stocks continue to march higher. Optimism about potential pro-growth policies has shifted to optimism about actual corporate earnings growth and an economy that is still creating jobs, despite a very low unemployment rate. Europe no longer has the “populist cloud” hanging over it that was threatening to bring an end to the European Union and the Euro common currency. Emerging markets, such as those in Asia and South America, are back in favor as the tough talk about tariffs and abandoning international trade agreements has begun to fade.

For the third quarter, the proxy for U.S. large company stocks (S&P 500) was up 4.5%, while the Russell Mid-Cap index returned 3.5%, and the Russell Small Cap index gained 5.7%. International stocks in the developed markets of Europe and Japan, as measured by the MSCI EAFE index, rose 5.4%, and the MSCI Emerging Markets benchmark did even better, gaining 7.9%. The bond market also managed to stay in positive territory, producing a return of 0.9%, based on the Barclays Aggregate index.

Interest rates will be closely watched for a number of reasons in the coming months. In addition to the Federal Reserve gradually raising short-term rates, it is also reducing its balance sheet by not reinvesting all of the proceeds from maturing treasuries and mortgage-backed securities. This is a reversal of the path the “Fed” launched in 2008 when it began to aggressively purchase these bonds in order to keep interest rates low and provide liquidity to the markets. The new plan is an attempt to keep inflation under control and return to a more normal operating environment. Lastly, Federal Reserve Chairperson, Janet Yellen, will likely be replaced when her term ends in February of 2018. While all of these factors will lead to some uncertainty and potential volatility, we do not see them as major risk factors at this point, since they have been telegraphed to market participants well in advance of their occurrence.

Hopefully, you now feel up to speed on the current state of the financial markets, so sit back and enjoy that Pumpkin Spiced Latte, watch your favorite team on Saturday or Sunday, tune out the day-to-day noise coming from the media and stay focused on your long-term goals.

Click here to read more about the author, John Cox, Chief Investment Officer of Warren Averett Asset Management, parent company of Emerant Wealth.