Stock and bond investors enjoyed solid gains in the third quarter, with returns for both the S&P 500 and the flagship bond benchmark (Bloomberg Aggregate Bond Index) advancing more than 5% for the period. In the case of stocks, rising share prices pushed gains for the year to near 20% as investors interpreted the Federal Reserve’s recent lowering of interest rates as bullish for the overall U.S. economy. Financial markets received additional support from moderating inflation and strong profit forecasts from corporations, in turn tamping down negative sentiment associated with geopolitical tensions and fears of an economic recession.
The resilience of the U.S. economy continues to be on display with GDP growth exceeding 3% during the past four quarters, spurred by higher working wages and a steady job market. In fact, the most recent unemployment report in October revealed 254,000 jobs were added to the economy which further lowered the unemployment rate to 4.1%. On the inflation front, Federal Reserve Chair Jay Powell has been winning the battle against rising prices. Notably, the August reading for the Personal Consumption Expenditure Price Index (PCE) registered at 2.2%, further evidence that the Fed is accomplishing their mandate to achieve price stability within the economy.
Politically, upcoming U.S. elections will add to a global record for legislative contests this year as votes will be cast in over eighty countries. Even so, the financial markets have taken the busy political calendar in stride, with investor attention staying focused on the economic conditions in each country, while placing less emphasis on candidate rhetoric and policy proposals. Many analysts have espoused that the future direction of financial markets will have less to do with the prevailing political party, and more to do with business conditions on the ground. Today, bullish investors are optimistic about S&P 500 companies being on the cusp of reporting five straight quarters of earnings growth, while market bears point to a stressed U.S. consumer buckling under record credit card debt of $1.14 trillion.
Looking ahead, financial markets will continue to contend with risks posed by the military conflicts on two continents, fresh concerns around climate disasters, and a polarized political environment. In the Middle East, an escalating war is testing global oil markets which have historically been prone to price spikes. For example, the Iranian Revolution in 1978 illustrated the inherent vulnerabilities in energy markets caused by supply disruptions. On a positive note, the world oil market has evolved over time in two important ways: oil cartel OPEC has built up surplus capacity to supply additional barrels of oil to market, while the United States’ export capacity of liquefied natural gas (LNG) is on track to double between 2024 and 2028, in turn further supporting world energy supply.
