Can the good times roll on for U.S. stock investors after eight straight quarters of gains for the blue-chip Dow?
Americans that own stocks in a 401(k) or other accounts should see bigger account balances when they review their quarterly statements after the U.S. market posted solid third-quarter gains as upbeat news on the global economy overshadowed a steady stream of negative news ranging from catastrophic hurricanes to cyber hacks and war chatter from North Korea.
And the gains could very well continue in the final three months of the year, thanks to a “resilient market fueled by rising expectations” for economic growth and corporate earnings, says Kate Warne, investment strategist at Edward Jones, a financial services firm based in Des Peres, Missouri.
Stocks could also get an added boost if the market begins to price in higher odds of President Trump getting his recently announced tax-cut plan passed early in 2018. Lower taxes will boost the profits of American companies and could spur more business spending.
“There’s renewed hope on the tax front,” says Nick Sargen, chief economist and senior investment advisor for Fort Washington Investment Advisors in Cincinnati.
The Standard & Poor’s 500, a broad stock index made up of some of the nation’s biggest publicly traded companies, posted solid gains, rising 4% in the third quarter to a fresh record and extending its year-to-date return to 12.5%.
The 30-stock Dow Jones industrial average fared even better, rallying 1,055 points, or 4.9% in the July-thru-September quarter. It is up 13.4% for the year. The Dow hasn’t suffered a losing quarter since the third quarter of 2015.
Tech investors also were rewarded, as the Nasdaq composite continued its market leadership role with a 5.8% quarterly rise that left it up 20.7% in 2017 and at an all-time high. The small-cap Russell 2000, which had been lagging, picked up steam late in September to finish the quarter up 5.3% and in record territory.
Nothing seems to be able to slow down the nearly nine-year-old bull market, not hurricanes Harvey or Irma, not threats of war from North Korea’s leader Kim Jong Un, not high-profile cyber heists at credit bureau Equifax and the Securities and Exchange Commission, a Wall Street regulator.
“Although the hurricanes and political tensions dominated the headlines in the third quarter, they didn’t seem to diminish investor, consumer and CEO optimism,” says Warne.
The U.S. stock market posted paper gains of $1.1 trillion in the third quarter, according to Wilshire Associates.
So what’s keeping what Jim Paulsen, chief investment strategist at The Leuthold Group, a Minneapolis-based investment firm, calls “The Teflon Market” going? “The economy,” he says.
The memory of slow 1.4% growth in the first three months of the year are fading after a 3.1% rebound in the second quarter and an economy on track for 2.3% growth in the just-ended quarter, according to Barclays, despite economic disruptions caused by violent weather events.
The resilience of the domestic economy, coupled with growth this year in most countries around the globe, has provided a lift to U.S. corporate profits, which are growing at their fastest pace in six years. Also underpinning stocks has been continued low inflation, which has kept the Federal Reserve from hiking interest rates too aggressively from historic, financial crisis-era lows.
“The bottom line is investors see the economy on solid footing, profits increasing and the Fed moving ever so slowly,” says Sargen.
Investor confidence in the economic outlook is a big reason why September — normally the worst month of the year for stocks — was the least volatile month for the S&P 500 since 1964, based on its average daily percentage change, according to Bespoke Investment Group.
The sectors posting the biggest gains in the third quarter were the market-leading tech sector, up 8.3%, and a resurgent energy group that rose 6% in the quarter — thanks to a nearly 10% surge in September. The gains, which followed a rough patch, were bolstered by U.S. oil prices climbing back above $50 per barrel amid an improving world economy.
Financial stocks also roared back, gaining 5.1% in September to finish the quarter up 4.8%. Banks benefited from a late-quarter rise in long-term interest rates and hopes of higher short-term rates after the Fed left the door open for another interest rate hike in December. Banks also got a boost from rising hopes for passage of Trump’s latest tax plan .
So what’s ahead for stocks in the final three months of 2017?
Paulsen thinks the market can climb another 3% to 4%, propelled by the same trends that have fueled gains so far this year.
The “biggest risk” facing investors could be “failing to invest in this bull market” and missing out on gains, adds Douglas Cote, chief market strategist at Voya Investment Management. He expects another stronger earnings season, which kicks off in a few weeks, to propel stocks higher.
Willie Delwiche, investment strategist at Baird in Milwaukee, says the market tends to finish the year strong after solid gains in the first nine months of the year.
Risks still exist
Not that there aren’t risks. The Fed remains a threat as it continues to take stimulus out of the system by raising borrowing costs and begins to pare back its $4.5 trillion bond portfolio, which could result in upward pressure on bond yields, says Jack Ablin, chief investment officer at BMO Private Bank.
“Fed tightening could present a challenge to stock risk-taking,” Ablin says.
And while company earnings should still be good, “the pace of growth is almost certain to slow,” warns Bill Stone, global chief investment strategist at PNC Asset Management.
Lisa Erickson, head of traditional investments at U.S. Bank Private Wealth Management, remains bullish but is a tad more cautious. She says she is on the lookout for any signs that consumers are spending less on things like houses and cars.
“Early signs of a slowdown in consumer spending” would be a concern, she says.
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