September was a mixed bag. Domestically, large cap stocks finished the month positive, while mid and small-cap stocks were negative. The S&P 500 TR finished the month positive by 0.57 percent but the S&P SmallCap 600 TR lost 3.17 percent. Developed international markets were positive while emerging markets were negative. Domestically it remains a strong year for stocks, small cap stocks continue to outperform, up 14.54 percent versus large cap stocks which are positive by 10.56 percent. The MSCI EAFE NR USD was positive for the month by 0.87 percent and the MSCI Emerging Markets NR USD lost 0.53 percent. Both developed and emerging international indexes are negative for the year-to-date, 1.43 percent and 7.68 percent, respectively.

High quality fixed income had a difficult quarter as interest rates climbed. The benchmark 10-year interest rate climbed 19 basis points during the quarter to 3.05 after peaking at 3.10 percent. There appears to be a ceiling around 3.11 percent but traders will be watching and if that level is breached you may see a quick move higher to 3.25 percent. The spread between the 2-year and 10-year yields, which we have been writing about all year, has gotten slightly tighter near month-end after expanding throughout the month. The spread closed the month at 24 basis points. The BBgBarc US Aggregate Bond index lost 0.64 percent of its value during September and is now negative by 1.60 percent year-to-date. High-yield bonds, which have a lower credit quality and are more correlated to equity returns, had a positive month, finishing positive by 0.56 percent for the month and by 2.57 percent year-to-date.

The Fed raised interest rates during September as expected by Wall Street. The Fed still indicated that a December rate hike was probable, with three more rate hikes next year and another one in 2020. The Fed also dropped the term “accommodative” when describing the Fed’s policy stance but later insisted that the dropping of the term does not signal a change in the likely path of policy. Chairman Powell was asked about rising inflation forcing the Fed to move more quickly, to which he responded “We don’t see that, it’s not in our forecasts.” This comment sent bond yields lower. President Trump also chimed in after the announcement, saying he was disappointed that the Fed decided to rise rates. Although not directly dictating rate decisions, the President continues to “toe the line” by threatening the independence between the President and the Fed.

The Trump Administration scored a win in trade talks with Canada as the month came to a close. Shortly before the deadline, Canada agreed to adhere to the terms of a renegotiated NAFTA deal, or as Trump prefers to call it, the United States-Mexico-Canada Agreement (USMCA). The headline changes include the granting of more access to Canada’s market for U.S. dairy farmers as well as updated quotas on the production of automobiles. Markets reacted positively to the 11^th hour deal, though the reaction is likely due more to the fact that a trade pact still exists than it is due to any particular concessions won by Trump.

Economic data in the U.S. continues to be strong. The final reading for second quarter GDP came in at an unrevised 4.2 percent, which was the best reading since the third quarter of 2014. Most economists expect a slight slowdown during the third quarter because of the trade issues but the stage is set for calendar year growth to be better than 3 percent. Consumer confidence recently hit an 18-year high; small business optimism is around record highs and corporate profits, with some help from tax reform, have increased by around 25 percent this year. The University of Michigan’s monthly survey of consumers hit 100.1 in the final reading of September, the triple-digit reading represents only the third time the reading hit triple-digits since 2004. Chief Economist for the University of Michigan said households reported “the most favorable financial prospects since 2004.” Consumer spending rose 0.3 percent during August after an unrevised 0.4 percent in July, reported by the Commerce Department near the end of September. Personal Income rose 0.3 percent in August following the same increase in July. Wages increased 0.5 percent while the savings rate remained unchanged at 6.6 percent.

Third-quarter earnings releases will begin in October. According to FactSet, the estimated earnings growth for the third quarter for companies in the S&P 500 is 19.3 percent, revised down from 20.4 percent at the end of the last quarter.

The biggest risks to the current rally are the impacts of an escalating trade war with China and others, and the impact of higher rates on the consumer. The President continues to increase tariffs on Chinese goods, despite what appeared to be China’s willingness to engage in trade discussions. The trade conversation is not over yet, the President is expected to engage with our European partners next before turning his attention to our largest trading partner and most complicated trading hurdle, China. 

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