The third quarter started strong as we reached a new all-time high for the S&P500 on July 26th. Profit taking took hold in August as China trade and Brexit continued to move the market based on the headline of the day. Similar to the second quarter, when the market was down in May and up in June, the market seemed to flip between a weak month followed by a recovery month. After a weak August, we breached S&P500 3000 again by the middle of September. The later part of the 3rd quarter was down again, but a higher low on the chart was set by October 3rd The market has rallied since then.
The recent China trade meeting was short on detail. However, the market was relieved to know that at least talks were continuing. As of this writing, there is news today of the potential for a signed trade deal with China at the Asia-Pacific Economic Cooperation (APEC) meeting which concludes in November. There is also news about a Brexit extension until the end of January next year. These positive news events, not to mention the successful terrorist raid by the United States this past weekend, have the market poised to open at a new all-time high today.
Though the news on China trade is welcome, the market fundamentals had already pushed the market to near highs. Corporate earnings for the third quarter have been good with a high percentage of companies beating on both the bottom-line (Earnings per share) and the top-line (Revenue growth). This week will be key as more than 140 S&P500 companies will report their earnings.
We continue to believe that China trade and Brexit will be background noise soon. That along with a more dovish Fed should propel the market higher as the fundamental outlook still looks good. With low interest rates, solid corporate earnings that are reasonably valued, and plenty of liquidity that can come to the market; we remain bullish intermediate to longer term.
We are entering November and December which have historically been two of the best months for the market. We believe last year’s 4th quarter was an aberration based on overly pessimistic concerns about global growth. We believe economic output will remain strong for the foreseeable future and do not see evidence that a recession is on the horizon anytime soon.
We do expect volatility to persist from time to time, but believe patience will continue to be rewarded during any short term periods of weakness.
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