MARKET BRIEFS: Q3 RECAP AND Q4 OUTLOOK

When Will This Party End?   |   Q3 2018 Market Overview   |   It’s Kinda Different This Time

Executive Summary

• Investors may be disappointed by the returns on diversified balanced portfolios. The year-to-date return for the US equity market (which often sets investor expectations because it is so frequently reported in the news) was significantly higher than those for bonds and international equities.
  
  

  Source: AssetMark, Zephyr Style Advisor

• Even among US stocks, returns like those of the market cap index were not as broadly available as investors might assume. A mere four stocks represented 40% of the year-to-date return for the S&P 500 and the top 10 stocks represented 54%¹. In addition, growth-style stocks enjoyed returns that were dramatically higher than those of value-style stocks.
• Investors may take comfort that the diversification that held back their returns year-to-date will help protect them when the market experiences a correction.

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¹ FactSet

• US equities¹ provided the strongest performance across the broad asset classes, returning 7.7% for the quarter and lifting the year-to-date return to 10.6%. As the S&P 500 hit new highs, it saw its best quarterly return since the end of 2013.
• Growth sectors continued to dominate with Technology and Healthcare contributing to over 50% of the quarterly return. Over the year-to-date period, Technology and Healthcare were joined by Consumer Discretionary as the only three sectors that outperformed the broad S&P 500 index, contributing over 85% of the index return.

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¹ US Equities represented by S&P 500

The story
After strong performance in January 2018, the narrative about the US equity market shifted to the concept of a “melt up.” The term is not well-defined, but the implication was that the higher market levels are in some way unjustified. After some turbulence in February and March, the market recovered and has since reached new record highs.

The reality
It is true that standard measures of stock market valuation are high relative to their entire history (including bear markets) and that the increase in these measures is responsible for some of the market’s total return. For example, Goldman Sachs estimates that 18% of the increase of the S&P 500 since the March 2009 market bottom can be attributed to an increase in the forward-looking Price/Earnings (P/E) ratio. However, this is a small percentage of the gains relative to recent bull markets. And, due to strong earnings growth, the P/E ratio has declined since the beginning of the year despite a strong increase in the market level.

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