The Economy Needs a 4th Quarter Comeback
After stumbling at the first of the year, U.S. stocks regained their footing with the NASDAQ +8.02, DOW +7.21, S&P 500 +6.08 and Barclays US Bond +5.19 year-to-date. The current bull market has become the second longest in American history and features a remarkable rebound from the scary days of 2008 and 2009 when fears of a collapse of the financial system caused stocks to crater. However, the market comeback has been marked with frequent panic attacks including the start of 2016 when a plunge fueled by fears of a global recession and worries about the downside of cheap oil created “the worst start of a year ever.”
The coming fourth quarter features many potential market moving events and the month of October has offered some nasty surprises in the past.
After five consecutive quarters of declining corporate earnings, the coming reporting season could prove to be important. With valuations at least modestly elevated, earnings need to start to carry the weight if this bull market is to advance. If earnings disappoint, the market could be vulnerable.
Recent U.S. economic data has been weaker: weaker-than-expected housing data with starts falling 5.8% and building permits dropping 2.3% in August; signs of a weakening auto market, and the Index of Leading Economic Indications falling 0.2%. As a result of this and other data, the Atlanta Fed has decreased its estimate of third quarter gross domestic product (GDP) growth down from 3.6% to 2.9%. This economic data could be seasonal brought on by a very quiet August, but it too will need to improve to carry this market further.
Add to these factors the two most asked questions: “When will the Federal Reserve raise interest rates again? And “How will the U.S. presidential election turn out and what will it mean?” At the most recent Federal Open Market Committee (FOMC) meeting the indication is a hike before year end contingent on economic data in the coming months. Historically, an “open election”—with no incumbent running—have brought choppier markets. If the polls remain tight into the election, volatility will remain elevated.
Other data, including low initial jobless claims, a low unemployment rate, rising wages, consumer confidence, and ongoing accommodative monetary policy lead us to believe that the economy will continue to muddle through 2017. We continue to see this secular bull market ongoing, but in a mature phase with heightened volatility. As we look to year end, we definitely are in need of a fourth quarter comeback in corporate earnings and improved economic data.