Q3 2018 U.S. Market Preview:
After some rocky moments this winter, U.S. equity markets are now performing positively. Year-to-date, the Nasdaq (+11.6%), small-cap S&P 600 (+11.0%), and Russell 2000 (+9.6%) indices have been the clear leaders. But the DJIA (+2.5%) and S&P 500 (+4.3%) indices are now positive for the year as well after solid quarter-to-date gains. The broadening of the market to include small-cap stocks and other sectors besides Technology and Retail, including Consumer Cyclicals and Transportation, is a bullish sign for investors. Still, U.S. equity markets have uncertainties to deal with. The first, detailed in our Strategy View dated June 6, is the likely slowing of U.S. corporate earnings growth over the next year as quarterly comparisons toughen given this year’s new tax bill and lower corporate tax rates. Second, the Federal Reserve continues to tighten financial conditions
and is now expected to raise the Federal Funds rate four times in 2018. Finally, as shown in the bar chart below, U.S. markets are entering the historically weakest quarter of the year. From 1970 to present, Q3 U.S. equity returns have been, on average, the weakest of the year, with the S&P 500, DJIA, Nasdaq, and S&P 600 posting negligible positive returns and the Russell 2000 posting losses.
