THE QUARTER IN BRIEF
Encouraging economic data and a series of unsettling news headlines vied for Wall Street’s attention in the third quarter, and ultimately, investors were not shaken. The S&P 500 rose 3.96% over three months, getting a lift from upbeat manufacturing and consumer confidence readings as well as earnings news. Away from our shores, the economies of China and the euro area showed improvement, and foreign stock benchmarks rallied along with ours. A slumping dollar offered no big spark for the commodities markets. The residential real estate market looked to be cooling off. The quarter was filled with major news stories, yet the bulls sauntered through the disruptions.

DOMESTIC ECONOMIC HEALTH
Consumer confidence barometers were among the most impressive economic indicators last quarter. By August, the Conference Board’s index topped 120, far above its origin score of 100; it was at 119.8 in September. The University of Michigan’s consumer sentiment gauge ended Q3 exactly where it ended Q2 – at a solid mark of 95.1, rebounding from a July dip to 93.4.

The economy’s two key purchasing manager indices were also elevated well above the 50 level, which also cheered Wall Street. In September, the Institute for Supply Management’s factory PMI jumped to 60.8 – rising above 60 for the first time in 13 years, after readings of 58.8 in August and 56.3 for July. ISM’s service sector PMI came in at 53.9 for July and 55.3 for August (at this writing, the September reading was pending).

Hiring eased during the quarter. Employers added 156,000 net new jobs in August after a July gain of 189,000. The main jobless rate ticked up from 4.3% in July to 4.4% in August, while the U-6 rate, tracking unemployment and underemployment, held at 8.6%.

Inflation showed definite signs of picking up, or at least, nearing the Federal Reserve’s 2.0% target. The Consumer Price Index showed a 12-month advance of 1.7% in July, then 1.9% in August. In both those months, core prices rose 1.7% year-over-year. The Producer Price Index displayed but a 1.9% yearly advance in July, which rose to 2.4% a month later.

With personal wages improving annually at a decent 2.5%, did personal spending increase? Not as much as economists hoped. The gain was 0.3% in July, but merely 0.1% in August.

Other data points from Q3 included a minor retreat for manufacturing production (down 0.1% in July and 0.3% in August), a rise and fall for industrial production (up 0.4% for July, down 0.9% just a month later), and a fall and rise in durable goods orders (which sank 6.8% in July but rose 1.7% for August). Retail sales were 0.3% higher in July and declined by 0.2% for August.

Few investors thought the Federal Reserve would tinker with interest rates in the third quarter, and it did not. It did announce a strategy to cut its $4.2 trillion balance sheet at its September policy meeting. Beginning in Q4, the Fed will allow $10 billion in bonds per month to run off, and the pace will accelerate to $20 billion per month in Q1, $30 billion per month in Q2, etc., to a monthly goal of $50 billion.

Cyber crimes were also conspicuous in the quarter. Credit reporting titan Equifax had its databases hacked, leaving the personal information of more than 140 million Americans at risk. Whole Foods and Sonic also suffered major identity theft breaches.

GLOBAL ECONOMIC HEALTH
News about the European economy was increasingly positive, even as Spain’s Catalonia region threatened to secede and Brexit negotiations continued. By August, euro area joblessness had fallen to 9.1%, an 8-year low; unemployment was down to a record-low 5.6% in Germany. Euro area consumer confidence rose to a high unseen since prior to the credit crisis, as the summer ended. In September, the European Central Bank forecast growth of 2.2% for the region, which could lead the ECB to wind down its longstanding bond-buying effort.

Late in the quarter, China’s official statistics bureau projected 6.9% GDP for the year; Nomura, JP Morgan Chase, and Citibank upgraded their forecasts for China’s 2017 growth to 6.8%. When it came to India, the outlook was far less rosy; as Q3 ended, the Asian Development Bank cut its GDP forecast for India’s current fiscal year by 0.4% to 7.0%, and Fitch Ratings slashed theirs by 0.5% to 6.9%. Particularly alarming was news that the Indian manufacturing sector had advanced only 1.2% year-over-year through July.

WORLD MARKETS
As September’s final trading day ended, 13-week (quarterly) gains were widespread among foreign benchmarks. The MSCI Emerging Markets index surged 7.02% in Q3. Not far behind was the Hang Seng; Hong Kong’s index soared 6.95%. The Shanghai Composite rose 4.90%. MSCI’s World Index posted an advance of 4.39%.

Quarterly improvements also occurred for the CAC 40 in France, which added 4.08%, and the DAX in Germany, up 4.09%. Canada’s TSX Composite rose 2.98%; Japan’s Nikkei 225, 1.61%; India’s Sensex, 1.45%. The United Kingdom’s FTSE 100 gained 0.82%. Australia’s All Ordinaries was an exception, putting up a Q3 loss of 1.11%.

COMMODITIES MARKETS
The U.S. Dollar Index weakened by another 2.66% in the third quarter, yet the broad raw materials market did not rally strongly in response; although, select futures did. Heating oil made the biggest advance among notable commodities, rising 21.9%. Elsewhere on the NYMEX, oil added 12.2%, closing at $51.64 on September 29.

Gold fell after hitting a YTD peak in the quarter, but ended Q3 at $1,284.80, its lowest close in more than a month. The yellow metal rose 3.4% in Q3. Silver prices increased only 0.3% to $16.68 across the quarter. Platinum went up 1.2%; palladium, 12.0%. Amid the base metals, zinc gained 15.0%; aluminum, 11.4%; copper, 9.2%. Cocoa stood out from most other crops with a 7.4% advance. Wheat lost 12.3%; cotton, 8.3%; corn, 4.1%. Natural gas ended up losing just 0.86% in three months.

REAL ESTATE
Prospective home buyers looked around and saw fewer homes on the market in the third quarter, along with fewer homes they could actually afford. According to the National Association of Realtors, the median existing home sale price in August was $253,000. The latest available edition of the 20-city S&P/Case-Shiller home price index (July) showed prices advancing 5.9% annually.

By August, the NAR reported that existing home sales had declined in four of the last five months. They were down 1.3% in July and another 1.7% a month later, with the sales pace reaching a 12-month low. The Census Bureau’s picture of new home buying was no better: a 5.5% stumble for new residential sales in July, a 3.4% dip in August.

Pending home sales also trended downward, falling 2.6% in August after a mild descent of 0.8% for July. Groundbreaking also lessened during the quarter. The Census Bureau identified a 2.2% reduction in housing starts for July, lessening to 0.8% in August. Building permits did rise 5.7% in the eighth month of the year after falling 4.1% during the seventh.

Between June 29 and September 28, fixed-rate home loans grew slightly more expensive, according to Freddie Mac’s Primary Mortgage Market Survey. On September 28, the survey showed the following interest rates: 30-year fixed, 3.83%; 15-year fixed, 3.13%; 5/1-year adjustable, 3.20%. The numbers from the June 29 snapshot: 30-year fixed, 3.88%; 15-year fixed, 3.17%; 5/1-year adjustable, 3.17%.²⁰

LOOKING BACK…LOOKING FORWARD
Tech shares and small caps outran the blue chips across summer, but not by much. During a fine quarter for U.S. stocks, the Russell 2000 nearly matched the gain on the Nasdaq, rising 5.33% and taking its YTD advance to 9.85%. The CBOE VIX volatility index fell 14.94% in Q3, putting its YTD loss at 32.26%. On September 29 at the closing bell, the key benchmarks settled as follows: Dow Jones Industrial Average, 22,405.09; S&P 500, 2,519.36; Nasdaq Composite, 6,495.96; Russell 2000, 1,490.86; CBOE VIX, 9.51.^1,21

Sources: wsj.com, bigcharts.com, treasury.gov – 9/29/17^1,21,22,23

Indices are unmanaged, do not incur fees or expenses, and cannot be invested into directly.

These returns do not include dividends.

Investors think of the fourth quarter as a “sweet spot” for the market, and they can cite history to affirm their belief. Since 1950, the S&P 500 has advanced in 79.1% of fourth quarters. Its average Q4 performance from 1950-2016: +3.9%. Both the Dow and S&P are entering the quarter on 6-month winning streaks, and bulls seem to be okay with the prospect of a Q4 rate hike and the Federal Reserve thinning its bond holdings. Then again, there is no sure thing on Wall Street. As an example, September has long been characterized as a bad month for equities, but that was not the case this year. Confidence is certainly abundant and anticipation is high as a new earnings season begins, and if history repeats itself, 2017 will go into the books as a strong year for U.S. equities.

Marc Aarons, 714-887-8000 or marc@ocmoneymanagers.com

MMI Disclosures

Citations.

^{1 – quotes.wsj.com/index/SPX [10/2/17]}

^{2 – investing.com/economic-calendar/ [10/1/17]}

^{3 – tradingeconomics.com/united-states/consumer-confidence [10/2/17]}

^{4 – investors.com/news/economy/ism-manufacturing-index-jumps-to-highest-since-2004/ [6/2/17]}

^{5 – instituteforsupplymanagement.org/ISMReport/NonMfgROB.cfm [9/6/17]}

^{6 – ncsl.org/research/labor-and-employment/national-employment-monthly-update.aspx [9/1/17]}

^{7 – foxbusiness.com/markets/2017/09/01/us-hiring-cools-off-with-156000-new-jobs-in-august.html [9/1/17]}

^{8 – marketwatch.com/economy-politics/calendars/economic [10/1/17]}

^{9 – nytimes.com/2017/09/20/business/economy/fed-bond-buying.html [9/20/17]}

^{10 – tinyurl.com/y7j6nw9f [9/29/17]}

^{11 – bloomberg.com/news/articles/2017-10-02/euro-area-s-danger-year-morphs-into-burst-of-economic-optimism [10/2/17]}

^{12 – globaltimes.cn/content/1068988.shtml [7/3/17]}

^{13 – financialexpress.com/economy/fitch-lowers-indias-growth-forecast-to-6-9/879410/ [10/2/17]}

^{14 – msci.com/end-of-day-data-search [10/2/17]}

^{15 – news.morningstar.com/index/indexReturn.html [10/2/17]}

^{16 – seekingalpha.com/article/4110889-commodities-3rd-quarter-overview-outlook-q4 [10/2/17]}

^{17 – money.cnn.com/data/commodities/ [9/29/17]}

^{18 – coinnews.net/2017/09/29/gold-silver-rise-in-3rd-quarter-us-mint-bullion-sales-mixed-in-september/ [9/29/17]}

^{19 – marketwatch.com/story/existing-home-sales-fall-in-august-for-the-fourth-time-in-five-months-2017-09-20 [9/20/17]}

^{20 – freddiemac.com/pmms/archive.html?year=2017 [10/1/17]}

^{21 – markets.wsj.com/us [9/29/17]}

^{22 – bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=9%2F29%2F16&x=0&y=0 [9/29/17]}

^{22 – bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=9%2F29%2F16&x=0&y=0 [9/29/17]}

^{22 – bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=9%2F29%2F16&x=0&y=0 [9/29/17]}

^{22 – bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=9%2F28%2F07&x=0&y=0 [9/29/17]}

^{22 – bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=9%2F28%2F07&x=0&y=0 [9/29/17]}

^{22 – bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=9%2F28%2F07&x=0&y=0 [9/29/17]}

^{23 – treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyieldAll [10/2/17]}

^{24 – foxbusiness.com/features/2017/10/01/market-snapshot-will-stock-market-live-up-to-4th-quarters-reputation-for-strength.html [10/1/17]}

_{^{This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. The information herein has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. Investments will fluctuate and when redeemed may be worth more or less than when originally invested. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. Indices do not incur management fees, costs and expenses, and cannot be invested into directly. All economic and performance data is historical and not indicative of future results. The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks. The NASDAQ Composite Index is a market-weighted index of all over-the-counter common stocks traded on the National Association of Securities Dealers Automated Quotation System. The Standard & Poor’s 500 (S&P 500) is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. NYSE Group, Inc. (NYSE:NYX) operates two securities exchanges: the New York Stock Exchange (the “NYSE”) and NYSE Arca (formerly known as the Archipelago Exchange, or ArcaEx®, and the Pacific Exchange). NYSE Group is a leading provider of securities listing, trading and market data products and services. The New York Mercantile Exchange, Inc. (NYMEX) is the world’s largest physical commodity futures exchange and the preeminent trading forum for energy and precious metals, with trading conducted through two divisions – the NYMEX Division, home to the energy, platinum, and palladium markets, and the COMEX Division, on which all other metals trade. The MSCI Emerging Markets Index is a float-adjusted market capitalization index consisting of indices in more than 25 emerging economies. The Hang Seng Index is a free float-adjusted market capitalization-weighted stock market index that is the main indicator of the overall market performance in Hong Kong. The SSE Composite Index is an index of all stocks (A shares and B shares) that are traded at the Shanghai Stock Exchange. The MSCI World Index is a free-float weighted equity index that includes developed world markets, and does not include emerging markets. The CAC-40 Index is a narrow-based, modified capitalization-weighted index of 40 companies listed on the Paris Bourse. The DAX 30 is a Blue Chip stock market index consisting of the 30 major German companies trading on the Frankfurt Stock Exchange. The S&P/TSX Composite Index is an index of the stock (equity) prices of the largest companies on the Toronto Stock Exchange (TSX) as measured by market capitalization. Nikkei 225 (Ticker: ^N225) is a stock market index for the Tokyo Stock Exchange (TSE).  The Nikkei average is the most watched index of Asian stocks. BSE Sensex or Bombay Stock Exchange Sensitivity Index is a value-weighted index composed of 30 stocks that started January 1, 1986. The FTSE 100 Index is a share index of the 100 most highly capitalized companies listed on the London Stock Exchange. The All Ordinaries (XAO) is considered a total market barometer for the Australian stock market and contains the 500 largest ASX-listed companies by way of market capitalization. The Russell 2000 Index is a small-cap stock market index of the bottom 2,000 stocks in the Russell 3000 Index. The CBOE Volatility Index® is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices. Additional risks are associated with international investing, such as currency fluctuations, political and economic instability and differences in accounting standards. This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. MarketingPro, Inc. is not affiliated with any person or firm that may be providing this information to you. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional}}