Third-Quarter Market Update & Outlook

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BKD’s Top Three

Don’t miss out on the latest news on the economy and markets. Check out the highlights in this third-quarter market update.

  • Concern about a potential downturn has increased, but evidence suggests the U.S. economy isn’t weakening.
  • Hurricanes Harvey, Irma and Maria have contributed to short-term effects on the economy and markets.
  • With the economy on solid footing, U.S. stock prices hit new all-time highs, and the Federal Reserve decided to reduce its balance sheet.

For more details, read Jeff Layman’s expanded market insight and quarterly commentary below.

U.S. stocks reached record highs in the third quarter, and international markets continued their strong advance. Bond returns were modestly positive as interest rates ended the quarter about where they started. Low volatility and interest rates translated into muted returns for alternative investments.

Are We Due for a Recession? Data Says Otherwise

The economy’s in one of the longest expansion periods in history, and evidence suggests the U.S. economy’s getting stronger.1 For example, second-quarter GDP growth was revised upward to 3.1 percent. In addition, consumer confidence rose in August to the second-highest level since 2001. Economic conditions also are improving across other parts of the world. Global growth is expected to hit a six-year high in 2017 and is based more broadly across countries and regions than at any point in the last 10 years. For these reasons, we believe recession is unlikely in the near term.

Economic Effect of Hurricanes Harvey, Irma & Maria

In the near term, economic activity and employment will decline in the areas affected by these storms. Over the long run, the repair and rebuild of property should add a temporary boost to economic growth. The influence of these storms on the investment markets will likely be limited. Historical analysis suggests municipal bonds issued in affected areas should experience low stress.

Positive Economic Factors Pointing to New Highs

Improving U.S. and international economic trends, significant profit gains and renewed optimism regarding tax cuts have combined to push U.S. stock prices to new all-time highs and foreign markets to multiyear highs. International stocks have been particularly strong for U.S. investors, returning almost 20 percent in 2017. But in most foreign markets, valuation is more attractive than in the United States. Profits also are improving, and a weaker dollar has provided an additional performance tailwind.

In addition, now that the economy is on solid footing, the Fed has decided to reduce the amount of bonds it owns. The Fed will gradually stop reinvesting a portion of the proceeds from maturities. Since U.S. interest rates are among the highest of all developed economies, there should be plenty of demand from other U.S. and foreign buyers to offset reduced Fed investment. Therefore, the Fed’s action isn’t expected to cause a significant rise in interest rates.

During exceptionally calm periods like this, it’s integral to remember volatility will rise again and often does so when least expected. It’s important to stick to a disciplined strategy. Earnings growth will be more important to stock returns going forward, as price-to-earnings multiples are unlikely to expand. After exceptionally strong diversified portfolio results so far in 2017, future return expectations should be tempered.

1Sources: Bureau of Economic Analonference Board, Capital Economics

Jeffrey A. Layman, CFA®

Chief Investment Officer

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BKD Wealth Advisors, LLC is an SEC-registered investment advisor offering wealth management services for affluent families and investment consulting services for institutional clients and is a wholly owned subsidiary of BKD, LLP. The views are as of the date of this publication and are subject to change. Different types of investments involve varying risks, and it should not be assumed that future performance of any investment or investment strategy or any noninvestment-related content will equal historical performance level(s), be suitable for your individual situation or prove successful. A copy of BKD Wealth Advisors' current written disclosure statement is available upon request.

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