Asset markets overall have made steady gains in the third quarter, backed by a continued synchronized global upswing. Stocks and US equities have kept up a strong pace throughout the third quarter with US large cap stocks up 4.70% and small caps up even higher at 6.05%. Markets were floated by a rush in energy, telecoms, commodities, and financial assets. Health care, utilities and consumer discretionary sectors held to mediocre growth. Developed and emerging markets posted some of their best gains to date with returns of 4.03% and 5.66%, respectively. Low inflation and favorable monetary policies around the globe have maintained investor confidence; fixed income returns remain positive - despite the two small interest rate hikes earlier in the year by the FOMC. The US Long Bond was up 0.97% for the quarter and 5.38% for the year. Even at current low levels, yields on Treasuries are attractive versus other highly rated international bonds, and this is likely to remain the case as long as the European Central Bank, the Bank of England, and the Bank of Japan focus on accommodative policies.
Less accommodative monetary policy as well as increased geopolitical risk in several countries, including China, may constrain the upside to growth going forward in Asian markets. China's rising import demand over the past year has helped exports in major countries significantly. The US and China are the two economies most central to global trade. Japanese equities also posted gains amid improving economic data. Politics took the headlines as Prime Minister Abe called an election to be held in October. Escalating political tension in the Korean peninsula represent a potential source for future market risk. Overall, however, markets showed lower volatility in the last quarter as modest economic tailwinds were present through most of the international and US markets. This is demonstrated by the chart shown below for the 10 asset classes tracked by JQR Capital.
In summary, the current bull market is one of the longest and strongest in recent history (although certainly not the longest or the strongest ever). Household debt in the US as well as current account deficits on the part of the Federal Reserve remain issues and yet the fundamental risk of global economic downturn is the lowest it has been for several years going into 2018.