Equities posted strong returns in the quarter as earnings across the globe continued to impress. Earnings in the U.S. increased more than 10% for the second consecutive quarter, which hasn’t happened since 2011. International earnings, both developed and emerging, grew even faster and consequently stocks internationally outperformed domestic stocks. In a case of déjà vu, domestically, the growth-oriented areas of the market easily outperformed the more defensive sectors. International stocks maintained this year’s dominance and both developed and emerging market returns exceeded domestic returns.
The Fed indicated that another interest rate hike was likely this year and projected three more in 2018. They are beginning to reduce the balance sheet starting in October. Interest rates increased after the Fed’s announcement and bond returns were modest, essentially providing interest but not appreciation.
Investors should anticipate lower domestic returns in 2018 as earnings growth will be more modest unless pro-growth policies are adopted. However, strong earnings growth and more attractive valuations internationally should provide support for above-average returns outside the U.S. Bond investors may face a difficult period if the Fed is able to execute on its campaign to raise interest rates. Historically, bond returns have been below-average during periods when the Fed raised interest rates.
Watch our market commentary video below, featuring Nicole Rice interviewing Chief Investment Officer Darin Richards, to hear more about the market trends this quarter.
