9 Month Market Review – as at September 30, 2017


When looking back on the quarter, we saw the continued upward march of global equities that even threats of nuclear war seem unable to stop. Hand in hand with the rise in equities, we’ve seen nearly no volatility. If we look back over the past two decades, on average, about one in every three trading days saw the S&P 500 rise or fall more than one percent. So far this year, the occurrence of a move this “big” has dropped to about one day in every twenty. And then of course there is Bitcoin, the virtual currency that rose by $3,100 in less than two months. After more than doubling in price, it plunged by a third in what was a hectic three-month period even by the virtual currency’s roller-coaster standards.


The “Trump trade” appears to be making a comeback, reflecting investors’ renewed belief in the strength of the U.S. economy and renewed optimism for business-boosting policy from Washington. The S&P 500 has risen 4% during the quarter, marking its eighth consecutive quarterly advance. The S&P 500 technology sector remains up 26% this year, making it the best performing of the 11 major sectors in the index for 2017. The Dow Jones Industrial Average added 4.9% in the third quarter, posting its longest streak of quarterly advances—eight—since 1997. The Russell 2000 index of small-capitalization companies, perceived to be some of the biggest beneficiaries of a tax overhaul because of their relatively heavy tax burden, climbed over 5%. The equity rally was by no means confined to the U.S., as developed markets outside of North America finished the quarter up 5.4%, while emerging markets continued their impressive run, rising an additional 6.7%.


In contrast to equities, the yield on the benchmark 10-year U.S. Treasury has spent the past six months range bound as the economy has maintained a slow and steady pace as consumer prices showed few signs of gathering momentum. However, in recent weeks a rebound in consumer prices and the renewed prospect of tax cuts spurred bond selling. The Fed has signaled its intentions for a third rate increase before year-end, helping to drive up yields (and lowering prices) on two-year Treasuries, which are more reactive to expectations for Fed policy, to their highest level since the Financial Crisis. Despite the recent sell off, core bond indices still managed a 1% gain during the quarter, while high yield and emerging market indices posted increases of 2% and 2.7% respectively over the period.


In a throwback to the days immediately after President Trump was elected, shares of U.S. banks and industrial companies are climbing and small-capitalization stocks are in record territory, while Treasury bonds and bond-like stocks appear to be falling out of favor. The U.S. dollar, beaten down for much of 2017, is rebounding. Underlying those trades are a combination of business fundamentals, economic data and policy expectations. Corporate earnings remain strong and help support the rise in equities, regardless of policy changes. While there is still some skepticism that the Republicans’ tax overhaul plan will pass, the fact that a proposal was put forth has given investors hope along with the prospect of improved earnings. Goldman Sachs’ economists believe that every percentage point reduction in the tax rate could boost the per-share earnings of the S&P 500 by a dollar. The developments could give investors fresh reason to believe stocks trading at or near records can keep rallying, despite concerns over pricey valuations and rising bond yields. Still, budding signs of an inflation uptick and the outline of tax changes are no guarantee that these bets will pay off.

Regardless of market movements, our portfolios remain well-diversified.