There’s no respect for the recovery in stocks – no respect at all. The S&P 500 composite of large US stocks returned to its all-time high October. Despite these new highs, investors still remain wary of this year’s gains in the market.
Underneath the headline, defensive sectors have continued to the lead the indices higher. Shares of utilities, consumer staples and real estate companies have posted strong gains. Small company stocks, perceived to be more susceptible to economic turbulence and trade disruptions, have lagged behind shares of larger companies.
Signs Britain is inching towards some sort of Brexit deal gave the pound a boost and aided sentiment across the Euro-region. The US dollar fell against other major currencies and global stocks outpaced domestic markets. Global stocks gained 2.7% while the S&P 500 gained 2.2% in October.
A lot of skepticism comes from the fact bonds have been in the driver’s seat much of this year. As bond yields have fallen, stock prices have risen. As the prospective return on bonds falls, other assets tend to look more attractive. For many, it feels as though these gains are illegitimate. Still, this discounting effect can be a strong tailwind for financial markets.
Despite investor’s persistent caution, things may be getting better. Economic data was better than forecasters expected. Corporate earnings have so far exceeded analyst’s forecasts. Investors took a mini-deal as a sign of progress on the China-US tariff negotiations. So much of how financial markets perform depends on what was expected to begin with.
Will the market see another fourth quarter correction?
For many of us, this drop in stock prices is still fresh in the back of our mind. The big question is will we see a repeat of last year or a Santa Claus rally?
Twelve months ago, investors worried the Federal Reserve would continue to tighten monetary policy despite cracks beginning to show in the global economy. That, combined with an end-of-year drop in liquidity, led to a sudden slump to finish December.
It’s unlikely that we will see a repeat of last year. The Fed has already shifted its stance, and investors seem more comfortable with the balanced message. But number of things could send the markets into a tizzy in the short-term. The world continues to be filled with things to worry about. We don’t see that ever changing.
Historically, stocks have ended the year on a good note, but that’s far from a law of investing. Investors in stocks should always be prepared for an unexpected ten percent drop at any moment.
End of the Year Will Be Here
With the holiday season fast approaching, end-of-year planning has a habit of sneaking. Clearly any end of year charitable giving will need to be done soon as well as required minimum distributions. Now is also a good time to consider your plans for the upcoming year. Are you anticipating any major life changes or a change in your tax situation for next year? It may be beneficial to think about these changes ahead of the rollover in the calendar year. We will be reviewing our clients’ situations into the end of the year.
What It All Means
Stocks often rally when it’s least expected. Markets are always looking ahead, weighing the risks as the world unfolds. The fact that bonds posted such strong returns over the twelve months is a reminder of the power of diversification. Much of what happens in the markets cannot be anticipated, but having a disciplined strategy puts you in the position to take advantage of the unexpected.
Contact us at 865-584-1850 or info@proffittgoodson.com