by P.J. DiNuzzo October 4, 2018
"DIA Insights"… "Personal Finance 2018" – Third Quarter Capital Market Review
If you believe that the trend is your friend, then perhaps the U.S. stock market is in for an excellent
fourth quarter. U.S. equity markets suffered small losses in the first quarter, followed by decent single-digit gains in the second quarter. Now that the third quarter is in the books, a somewhat larger gain has put stocks in solid positive territory for the year.
The Wilshire 5000 Total Market Index-the broadest measure of U.S. stocks-finished the quarter up 7.27% and has gained 10.68% so far this year.
Large cap stocks led the way. The widely-quoted S&P 500 index of large company stocks gained 7.20% in value during the year's third quarter, rallying to an 8.99% gain so far in 2018.
The Wilshire U.S. Small-Cap index posted a 3.65% gain over the third quarter of the year, and now stands up 10.99% so far in 2018. The comparable Russell 2000 Small-Cap Index has gained 11.51% for the year.
International stocks are not faring quite so well. The broad-based MSCI EAFE index of companies in developed foreign economies gained just 0.76% in the recent quarter, and is now minus 3.76% for the year. In aggregate, European stocks were up a meager 0.39% over the last three months, posting an overall loss of 4.86% for the year, while MSCI's EAFE's Far East Index gained a slightly more robust 2.23% in the third quarter, losing 1.18% so far in 2018. Emerging market stocks of less developed countries, as represented by the MSCI EAFE EM index, went into negative territory for the quarter, down 2.02%, for a loss of 9.54% for the year.
Looking over the other investment categories, real estate, as measured by the Wilshire U.S. REIT index, gained 0.72% during the year's third quarter, and is just eking out a 2.25% gain for the year.
In the bond markets, coupon rates on 10-year Treasury bonds have continued an incremental rise to a 3.06% annual coupon rate, while the yields on 30-year government bond yields have risen slightly to 3.21%. But short-term yields are catching up; 3-month Treasury bills are now paying investors 2.20%, and one-year Treasuries yield 2.56% on an unusually flat yield curve. Normally, bond investors have to be paid much more to hold longer-term paper, due to the always-present uncertainties in interest rate movements and other factors.
Five-year municipal bonds are yielding, on average, 2.23% a year, while 30-year munis are yielding 3.26% on average.
What's going on? The American economy roared in the second quarter of the year, with 4.2% GDP growth by short-term corporate earnings as a result of the tax cuts, and by a short-term effort by multinational companies to complete as much overseas business as possible-including via their manufacturing supply chains-before the widely-publicized tariffs took effect.
On the jobs front, initial claims for state unemployment benefits rose by 12,000 to a seasonally-adjusted level of 214,000-above expectations. On the manufacturing front, non-defense capital goods orders excluding aircraft, a proxy for business investment, fell 0.5% in the recent quarter. Altogether, we may be looking at a year of 3% growth.
Sincerely,
P.J. DiNuzzo, CPA, PFS, AIF®, MSTx, MBA
President, Founder, and Chief Investment Officer