Despite its reputation as the worst seasonal period for stocks, global stock markets rallied again. Emerging-market stocks were strongest, surging 8 percent, followed by European stocks, which gained 6.2 percent. More broadly, developed international stocks rose 5.5 percent. For the third consecutive quarter, the U.S. dollar depreciated against foreign currencies, boosting dollar-based investor returns in these markets.
Our portfolios have benefited over the past year from the very strong relative and absolute performance of international and emerging-market stocks. Yet foreign stocks continue to look very attractive relative to U.S. stocks and offer solid absolute expected returns.
The U.S. market delivered strong returns in the third quarter, extending its winning streak to eight consecutive quarters and a remarkable 18 out of the last 19 quarters. The S&P 500 Index closed at an all-time high, gaining 4.5 percent.
Within the U.S. market, larger-cap growth stocks—technology stocks in particular—continued their year-to-date dominance over smaller-cap and value stocks, a sharp reversal from what we saw last year. Looking at industry sectors, energy stocks had a big rebound as oil prices rose above $50. But for the year, the sector is still down 6.6 percent, while technology and health care have soared 27 percent and 20 percent, respectively.
One indicator of how calm the stock market has been this year is that its largest decline (drawdown) has been a loss of 2.8 percent (from March 1 to April 13). Going back to 1929, there has been only one calendar year when the largest drawdown was smaller than that, according to Ned Davis Research.
Moving to the fixed-income markets, core investment-grade bonds inched up 0.7 percent for the quarter. The 10-year Treasury yield (which moves inversely to bond prices) ended the quarter flat, but this masked intra-quarter shifts. It bottomed in early September as fears over North Korea, hurricanes, and political events peaked. But the yield shot up into month-end, closing the quarter right about where it stood three months earlier.
Credit-sensitive (higher-risk) sectors of the fixed-income market outperformed core bonds for the quarter. The high-yield bond index gained 2 percent and floating-rate loans were up 1 percent. Our portfolios have also benefited from exposure to actively managed, absolute-return-oriented bond funds, which again outperformed core bonds overall this quarter.
In this quarter’s commentary, we highlight a few of the positive economic indicators in support of a synchronized global growth recovery. But, as always, there are significant uncertainties and “unknowables” when it comes to economic forecasting. Humility and intellectual honesty—knowing what you don’t know and what you can’t know and can’t accurately predict—are crucial. Stock market corrections can happen any time despite the global economy’s current health, and investors should prepare themselves for market dips and drops along the way.