By Jeffrey Powell – Managing Director, Polaris Greystone Financial Group, LLC

The S&P 500 soared 7.2% during the third quarter, the best quarter since Q4 2013. These solid gains occurred due to strong earnings reports, with S&P 500 companies reporting a second consecutive quarter of 25% earnings increase. The markets were able to ignore the back and forth media attacks between China and the United States, as trade war tariffs escalated.

The third quarter market performance pushed the S&P 500 up 8.99% for the year, with large-cap growth having the top performance of the Morningstar nine-square grid style box (large, mid, small/value, blend and growth). The Polaris Greystone strategies have fared very well given that the Russell 1000 Value Index, our nearest benchmark, is only up 4.36% for the year.

Third Quarter Highlights

  • Growth outperformed value at all three market-cap levels.
  • Large-cap significantly outperformed small-cap for the quarter (by almost 5%), wiping out small-cap’s out performance for the year.
  • The Russell Top 200 Growth (largest growth companies) has beaten the Russell Top 200 Value (largest dividend-paying companies) for seven consecutive quarters, the longest streak since data began in 1985.
  • All nine style boxes are up at least 3% for the year.
  • Health care and information technology were the two top performing sectors, up 14% and 12%, respectively.
  • The two worst performing sectors were energy and materials, down 0.11% and 0.14%, respectively.
  • Real estate and utilities lagged the broad-based S&P 500 due to their interest rate sensitive nature. Real estate lost 0.02% of its value, whereas utilities provided a scant 1.51% return.
  • Standard and Poors recalibrated its sectors, introducing a new sector called the “communication services” sector, replacing the telecommunications sector. This new sector represents approximately 10.8% of the market, pulling in companies that once were in the technology sector, consumer discretionary sector and telecommunications sectors. The largest five names in this sector are Facebook, Alphabet (Google), AT&T, Verizon and Walt Disney Company.
  • The worst quarterly performing segments of the market were gold, long-term treasuries, and the commodities index, down 4.85%, 2.88% and 0.24%, respectively for the quarter.
  • Gold is down 8.77% for the year, making it the worst performing segment of the market.
  • Long-term treasuries are down 5.79% for the year, with emerging markets (-2.86%) and the Bloomberg Barclays Aggregate Bond Index (-1.60%) also losing ground.
  • The United States has contributed 4.74% of the All Country World Index’s 3.84% gain for the year. Meaning that on a capweighted, local currency basis, the MSCI ex-U.S. Index is down for 2018.
  • While not as strong as the U.S. market move, Japan erased its loss for the year by popping 5.55% (in local currency) for the quarter. It is up 0.67% for the year.
  • Europe ex. U.K. gained 1.66% for the quarter, but is still down 1.55% for the year. Gains were driven by Switzerland (5.45%) and France (3.25%), but countries like Portugal, Belgium, Netherlands, Italy, Ireland and Spain fell in value during the third quarter.
  • Emerging Markets Asia was the worst region during the third quarter, down 2.1% (year-to-date -5.7%), with China plunging 8.6% (down 10.7% for the year).

What Happens From Here

We remain very bullish about the markets over the next 12 months. Here is why we think the markets will go higher from here:

  • Earning expectations for the next four quarters remains very strong.
  • S&P 500 companies reported record-share buybacks.
  • Our economy is growing faster than it has for years.
  • There remains above average earning growth.
  • The U.S. dollar remains trade ranged, posing no threat to trade.
  • The United States still has a trade imbalance. From a historical perspective this imbalance is as low as it has been since the late 90s.
  • Our secular bull market is well intact.

While all the technical research points to a strong market and our macroeconomics look good, the sentiment looks a little frothy, but not out of the spectrum of normal. As a result, we remain bullish going into the fourth quarter. Contact one of the financial advisors at Polaris Greystone to review your portfolio to ensure you are prepared if risk changes.

Polaris Greystone Financial Group, LLC is a federally registered investment adviser.  The information, statements and opinions expressed in this material are provided for general information only and are subject to change without notice. This material does not take into account your particular investment objectives, financial situation or needs, is not intended as a recommendation to purchase or sell any security, and is not intended as individual or specific advice.  Investing involves risk and possible loss of principal capital.  Advisory services are only offered to clients or prospective clients where Polaris Greystone Financial Group, LLC and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Polaris Greystone Financial Group, LLC unless a client service agreement is in place.