U.S. stocks turned in their best quarter of the year despite mostly losing ground in the final week.
The Dow finished the third quarter up 9.0% before dividends, its best showing since the fourth quarter of last year, despite losing 1.1% last week. Both the S&P 500 and NASDAQ rose more than 7% for the quarter after the S&P lost 0.5% for the week and NASDAQ gained 0.7%. Midcaps and small cap stocks fell more than 1% last week to finish the quarter up 3.4% and 4.3%, respectively. Year-to-date, NASDAQ leads by a wide margin, up 16.6%, while the S&P is up 9.0% and the Dow higher by 7.0%.
Japanese stocks were the best performers outside the U.S. in Q3, at least in local currency terms. The Nikkei 225 gained 8.1% after climbing 5.5% in September; the index is up 6.0% so far this year. Chinese stocks rebounded by 3.5% last month but still ended down 0.9% for the quarter and 14.7% year to date. European stocks, as measured by the Stoxx Europe 600, gained 0.9% for the quarter but are down 1.5% YTD in euro terms. In the U.S. Treasury bond market, the yield on the benchmark 10-year note remained above 3.0% for the second week in a row, closing Friday at 3.06%, unchanged for the week but down from its 3.11% high reached on Tuesday. The yield on the note was up 20 basis points for the quarter and 65 bps since the beginning of the year.
As expected, the Federal Reserve raised its benchmark interest rate and left little doubt that more increases would be coming at regular intervals over the next several months. The Fed’s rate-setting committee voted unanimously to raise the federal funds rate to a range of 2% to 2.25%, its highest level since April 2008. It said it expects “further gradual increases” ahead. Notably, the Fed left out the word “accommodative” from its post-meeting rate announcement to describe its monetary policy, although at his press conference Fed chair Jerome Powell said, “It is still accommodative. This change [in wording] does not signal any change in the likely path of policy.” The Fed also raised fairly significantly its forecast for GDP growth this year to 3.1%, up from 2.8% in its June forecast.
There are was a full slate of economic reports released during the week as the month and quarter ended. The second and final estimate for second quarter GDP came in at 4.2% annual growth, unchanged from the previous estimate. But after-tax corporate profits were scaled back to a 6.4% increase from 6.7% previously. The headline durable goods orders figure for August rose a better-than-expected 4.5% following a 1.2% decline in July, but the number was skewed by a huge jump in the volatile aircraft sector; excluding transportation, the increase was only 0.1%, below expectations. Likewise, core capital goods fell 0.5%, down from the prior month. But consumer confidence numbers were strong. The Conference Board’s index ended September at 138.4, its highest reading in 18 years and well above expectations, while the University of Michigan’s index rose nearly five points from August to 100.1. Consumer spending and personal incomes were both up 0.3% in August while the core PCE price index, excluding food and energy prices, was unchanged from July, up 2.0% compared to a year ago.
Housing sector numbers were mostly negative. Pending home sales, a forward indicator, dropped 1.8% in August, the fourth decline in the last five months and down from the prior month’s 0.8% decline. Sales of newly built homes rose 3.5% to an annual rate of 629,000, but the prior two months’ figures were revised downward by a total of nearly 40,000 units. Sales got a boost from builders dropping prices. Home price gains continued to slow in the larger housing market. The S&P CoreLogic Case-Shiller 20-city home price index rose 5.9% in July compared to a year earlier, down from June’s 6.4% year-on-year increase.
Reports/dates/facts/links worth paying attention to over the next week:
1. October 1: Institute for Supply Management manufacturing composite index for September; construction spending for August.
2. October 3: ISM non-manufacturing index for September; ADP national employment report for September.
3. October 4: Weekly unemployment claims; factory orders for August.
4. October 5: Employment situation for September.