See our recap of September’s key statistics and market commentary below.

Noteworthy Numbers

The S&P 500 finished positive for the 11th straight month in a row. This is an all-time record for the index, which has been around since 1957. 

In trillions, the size of the Federal Reserve balance sheet. The Fed announced it would begin a policy of balance sheet reduction in October.

Leading economic indicators increased 0.4 percent in August up from 0.2 percent increase expected from economists polled by Reuters. U.S. durable goods orders rose 1.7 percent in August versus the one percent increase expected. These are just two indicators pointing to continued strength in the economy.

Our Take

Stocks continued to roll higher in September against a backdrop of positive economic news and a lack of significant headwinds. The S&P 500 was up by 2.06%, positive for the 11th straight month. International markets were mixed, with stocks from developing countries continuing their strong run while stocks from emerging markets lost slightly, a break from the impressive returns the asset class has seen over the last 12 months. Interest rates ticked higher as market observers weighed the potential for a new rate hike by the Fed later in the year, as well as the Fed’s announcement during the month that it would begin to unwind its $4.5 trillion balance sheet. September closes out what has been a solid third quarter for just about every major asset class. As we enter into October we observe a number of reasons to be optimistic in the near-term while acknowledging that, despite record low volatility in the markets, there are potential challenges on the horizon.

The Fed is likely to be the focus of market participants throughout the rest of the year for two reasons. First, there is increasing speculation that the Fed will raise its current interest rate target from a 1.00-1.25 percent range to a 1.25-1.50 percent range. This would represent the fifth rate hike since the Fed began raising the rate from near zero at the end of 2015. While the CME Group’s FedWatch Tool places the chance of a December rate hike at 81 percent, those odds may change as new data on employment, and particularly inflation, gets released during the fourth quarter. Below-target inflation continues to hinder the Fed’s rationale for new rate hikes. The second reason that the Fed will take center stage is because of its recently announced decision to begin winding down its $4.5 trillion balance sheet. The Fed’s balance sheet grew to this size during two massive rounds of asset purchases, termed “Quantitative Easing,” which took place in the wake of the Great Recession. Rather than actively sell the bonds on its balance sheet, the Fed will instead simply stop reinvesting the proceeds from bonds as they reach maturity. This process will begin in October, and it appears that markets appear comfortable with the pace of this wind down. However, if an overheating economy compelled the Fed to accelerate the process; such a move could destabilize markets.

Corporate earnings for the third quarter will begin to trickle out in the latter half of October. These releases should provide additional cause for optimism, as recent guidance put out by corporations has been overall positive. According to FactSet, more S&P 500 companies are issuing positive revenue guidance. Overall 54 companies in the S&P 500 have issued positive guidance which is more than double the five-year average. This is leading to a higher number of companies issuing positive Earnings Per Share guidance compared to the five-year average. Companies issuing lower guidance is also below the five-year average. Investors will need to adjust their interpretation of corporate and economic data releases over the next couple of months due to the impact of hurricanes Harvey, Irma and Maria. Some industries have been more disrupted than others but, with Puerto Rico being a notable exception, the general view is that the damage incurred will be a hit to the economy over the short-term but will actually help economic growth over the long-term as the rebuilding begins. A quick way to generate bi-partisan support of government spending is to suffer through catastrophic damages.

The Trump administration and the rest of the GOP in Washington will make private and corporate taxes the focus of their efforts over the coming months. Trump’s plan, released near the end of September, includes a number of changes for businesses and individuals. Highlights for businesses include cutting the corporate tax rate from 35 percent to 20 percent and a 25 percent pass-through rate for small business owners. For individuals, Trump’s plan raises the standard deduction and reduces the current seven income brackets to three, including lowering the top rate from 39.6 percent to 35 percent, among other things. Based on the original framework many investors would view this plan favorably, but the plan still lacks significant details and the reality of its passage is unlikely without modification.

Allocations to international stocks have continued to reward investors. Developed markets have returned nearly 20 percent so far in 2017, while emerging markets, despite a weak September, have returned close to 30 percent during the same time period. Western Europe, which constitutes a large portion of developed markets, appears to be growing economically and is currently devoid of any of the political crises that have threatened the region in recent years. In late September, German Chancellor Angela Merkel won reelection for the fourth time, despite having a weaker coalition than before.

These are good times for investment markets. Investors should feel confident, but not invincible. Growth slows, headwinds emerge and key actors like the Fed can make mistakes. We encourage our clients to take stock of whether their financial situation has changed recently and take this opportunity to discuss portfolio changes with us, if warranted.

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