Third Quarter 2016 Market Review

The stock market shifted gears during the third quarter as investor concerns over the economy faded. As a result, growth oriented equities (like Technology stocks) moved from the worst performing (-2.84%) economic sector during the second quarter, to the best (+12.9%) during the third period. And because higher inflation and interest rates are highly correlated with faster economic growth, interest rate sensitive stocks such as utilities and telecom issues both declined almost 6% during the quarter. Third quarter corporate earnings came in above estimates and interest rates started an uptrend which accelerated over the next several weeks. The S&P 500 stock index increased 3.85% while the bond market, based on Barclays Intermediate Government Corporate Index, increased 1.21%.

Despite the near complete absence of fiscal stimulus, the economy showed good improvement during the third quarter and given the recent strength of the stock market, investors appear to be betting that the improved trend will continue. Corporate profit growth improved in the third quarter and forward earnings estimates rose to a record high during the first week in October. The CRB raw industrial spot price index has recovered smartly of late. That’s good news since there’s a very strong correlation between the level of inflation and earnings growth. Jobless claims are at their lowest readings since 1973 and wages are beginning to improve which should support higher levels of consumer spending going forward. Finally, history shows that the absence of political gridlock in America has been good for economic growth and stock prices no matter if it be Democrats or Republicans in control.

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