Third Quarter 2018: The Only Game in Town
The bull market that began in early 2009 is now the longest on record in the United States, surpassing all previous expansions in length (if not in total gain). The continued rally this quarter was a microcosm for 2018 as a whole: U.S. equities were strongly positive, while diversifying asset classes posted negligible returns. Investors have continued to prefer technology and faster-growing companies, with the S&P 500 Growth Index returning 9.3% in the quarter versus the 5.9% posted by the S&P 500 Value Index. Apple made history as it became the first company with a trillion-dollar market capitalization, a feat that Amazon was quick to follow.
U.S. equity has been the only game in town; returns for other major assets have disappointed. A continued trade war has pushed the US dollar upward, harming both international markets and their returns to U.S. investors. Emerging markets, many of which depend on debt issued in U.S. dollars, suffered the most. In September, President Trump announced another round of tariffs on Chinese goods and threatened that he was ready to impose additional levies on the remaining $270 billion of goods currently imported from China should the Chinese government take retaliatory action. The Trump Administration was also able to come to agreement for a possible update to the North American Free Trade Agreement with Canada and Mexico.
Domestic economic growth has been strong, and GDP and employment numbers continue to grow. Even still, real wages have been flat as inflation is starting to eat away at nominal gains. Given that backdrop, it was not surprising to see the Federal Reserve raise rates, with another increase expected before the end of the year. Long-term rates have moved up only slowly compared to shorter-term rates and the result is an increasingly flat yield curve. Most types of bonds posted flat returns in the quarter.