The overall economy has shown great resilience despite a grid-locked Washington and back-to-back hurricanes. U.S. Real Gross Domestic Product (GDP) grew at an unexpected pace of 3.0% in the third quarter, versus a 2.5% consensus estimate, marking the second consecutive quarter of GDP growth at or above 3.0%. The recent economic surge has been largely supported by a relatively strong industrial-production backdrop and burgeoning retail sales. Consumer spending, which accounts for more than two-thirds of U.S. economic activity, recorded its largest increase in September in eight years as consumers in Florida and Texas replace storm-damaged vehicles. The labor market tightened in October, following hurricane-related disruptions in September. According to the ADP payroll report, employers added 235,000 jobs - beating economists’ expectations. Payrolls have grown at an average rate of 172,000 per month so far in 2017 as the labor market nears “full” employment. The unemployment rate now stands at 4.1%, the lowest level in over 16 years. Overall, the combination of steady growth, low interest rates, and the absence of inflation concerns have provided fuel for the markets to produce strong returns. As we move into the fourth quarter, investors will need to digest the potential impact of a GOP tax reform package against equity markets trading at all-time highs.
Technology shares continued their rally, propelling the NASDAQ Index to close the month up 3.6%, marking the fourth consecutive month of gains and besting all domestic counterparts. The S&P 500 Index rose 2.3% in October, posting a remarkable 10-month trend of positive gains, a feat that has not been witnessed in 90 years. Investors continue to favor “growth” stocks over their “value” counterparts as is evidenced by the S&P 500 Growth Index outperforming the S&P 500 Value Index by 13.5% so far this year. International equity markets have also posted strong returns on the back of improving global growth. The MSCI Emerging Markets and EAFE (developed markets) indices are up 32.7% and 22.3%, respectively, year-to-date.
Yields on government bonds drifted higher in October, resulting in slightly negative returns for all but the shortest maturity bonds. Corporate bond spreads continued to narrow throughout the month and remain at levels not seen since before the financial crisis. The Federal Reserve maintained its target rate of 1.25% at their most recent meeting, but signaled that a December rate hike is a strong possibility. The December meeting should also provide more clarity regarding the Fed’s plan to unwind its $4.5 trillion securities portfolio. Jerome Powell will likely replace Janet Yellen as Fed Chair after her term expires in February. Powell has been a supporter of Yellen and Fed policy is not expected to materially change under Powell’s watch.