September 2018 Market Update

Published on October 4, 2018 | Posted in Tips & Updates

The third quarter proved to be a positive one for stocks across the board. Over the past three months, equity prices saw a 9.01% increase in the Dow Jones Industrial Average and a 7.20% advance in the S&P 500, a broader measure of large-cap stocks. Notably, this accounts for the majority of all gains year to date (YTD). In September, the Dow led the way, up 1.90% compared to the S&P 500 which edged forward by 0.43%. Small-caps and technology stocks faced pressure as multiple rounds of reciprocal tariff increases came into effect between the United States and China but both held onto considerable gains YTD.

Initial payroll data for September was strong. Private payroll figures, released by ADP, show that the private sector added 230,000 jobs in September. That’s higher than the consensus estimate of 179,000. The largest sectors showing gains were goods-producing and construction with gains of 46,000 and 34,000, respectively. Consumer confidence soared this month and neared an 18-year high. Strong confidence is due to expectations of robust economic growth continuing. Equity performance YTD supports strong consumer confidence as cyclical sectors like consumer discretionary and technology stocks lead the way with both up around 18% YTD, while defensive stocks lag the overall market.

Interest rates rose in September, with the 10-year US Treasury yield up 21 basis points to 3.06% as of September 28th. The Federal Open Market Committee (FOMC) met in late September and voted to raise the target federal funds rate range 25 basis points, to 2.00%-2.25%. We expect the FOMC to implement an additional 25 basis point rate increase before the end of 2018, with three more rate hikes on tap for 2019. This suggests that we may reach targeted long term interest rates before 2020 and see rate hikes slow down after that. The timing of the next hike appears to be most likely to occur at the December FOMC meeting. A flattening yield curve remains challenging to portfolio managers. While investors now have the ability to buy a 1-year CD at 2.50%, you have to go out an additional 9 years to garner another 1% and reach 3.50% on a CD. The general rise in CD rates has outpaced growth in yields in other fixed income asset classes, like corporate bonds, agency bonds, or treasuries where risk premiums suggest it should be the other way around. The largest benefit of this trend is that rising bond yields over time will give enhanced income opportunities for low risk investors, but that will be countered with price declines and underperformance of one’s existing bond holdings. However, for those with a proper ladder in place and the ability to hold bonds to maturity, losses are not realized.

The fourth quarter is expected be a continuation of what we have experienced recently. The prospects of rising interest rates, favorable domestic economic trends, and trade uncertainties will remain top of mind for investors. Next month’s mid-term elections will likely create political uncertainty and capture the national dialogue for the next 30 days, but fundamentals should keep market conditions stable. We appreciate the opportunity to provide full-service trust and financial services to our clients. If you have questions about what any of these factors might mean to your financial situation, please contact one of our investment professionals today. Thank you for choosing SNB-T for your financial services needs.