Hello, I hope this finds you well! Today I will share with you a brief overview of the markets in the third quarter, and I will explain why we actually have been in a recession.
But first the market data…
Stocks and bonds both rose in the third quarter, with the S&P500 posting a 3.9% total return, and the Barclays Aggregate Bond index rising 0.5%. Analysts are quoting central bank support (ie. low interest rates) as the theme helping to support the market’s run. We saw a change in leadership among the S&P500 sectors last quarter, with the cyclicals performing better than the defensives, as technology rose almost 13% in the quarter!
Now, let’s switch gears to the recession topic. Even though I have been saying recently that we are definitely NOT in an economic recession, we have been in an earnings recession for about a year now – since the 3rdQ of 2015, according to Thomson Reuters, and there are a couple of reasons why this is unique – first, it is very rare that we have such a slump in corporate profits outside of an economic recession; even though the US economy is growing slowly, it is still growing. Second, this streak of earnings declines is one of the longest earnings recessions in the history of the index – though far from the deepest.
So what do we expect moving forward? The beginning of a new quarter marks the beginning of a new earnings season, when companies generally report earnings from the previous quarter. Thomson-tracked consensus estimates are calling for a 0.7% decline in YOY S&P500 earnings in Q3, but typically companies deliver about a 3% upside surprise. Should the upside this happen again this quarter, we could see a 2-3% earnings gain, which would officially end this long earnings recession. As I have said in past, the energy sector and dollar both stabilizing could provide this positive momentum, so we will see how this earnings season plays out.
Thank you for taking the time to read this, and as always, if you have any questions, please feel free to reach out.
Sources: from LPL Research 3rd Quarter 2016 Market Insight
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indexes are unmanaged and cannot be invested into directly
The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The Barclays Capital Aggregate Bond Index, which used to be called the "Lehman Aggregate Bond Index," is a broad base index, maintained by Barclays Capital, which took over the index business of the now defunct Lehman Brothers, and is often used to represent investment grade bonds being traded in United States.