As we head into the final quarter of the year, I feel this would be a good time to reflect back on 2018 and answer the question which is on everyone’s mind. When will the Bull Run be over?

A few bright spots after a bright start.

This year has been an interesting one for the stock markets. In January it was off to the races for the stock markets as all the major indices rocketed to new all-time highs. Then February came along and inflation fears and concerns over rising interest rates sank the markets. We saw the worst two week decline in over 5 years pushing the S&P into correction territory. Those fears were very short lived as the markets rebounded with one of the best one week rallies we had seen in the past 5 years on continued growth in the economy and strong earnings. Of course, it didn’t take long for some other event to surface and force the markets to retest their lows in February throughout March and April. This time the main culprit was the announcement and concerns over tariffs and trade war. Since April the U.S markets have steadily gained back the losses from that first quarter despite the mounting headwinds weighing on global growth which has negatively affected international markets and even more so the emerging markets. However, the gains in our U.S market were not evenly distributed across the board. Most of the market gain was focused on a few growth sectors, and I would almost go as far as saying that much of the overall gain in the broad market could be narrowed down to several individual stocks themselves. U.S Large Cap tech stocks have been one bright spot for the year as well as some areas in aerospace, healthcare and energy. While financials, consumer staples, real estate and basic materials stocks have been a drag on the markets. But even in these broad sectors there has not been equality in performance. As an example, the FAANG stocks (Excluding Facebook) have done spectacular and have been large contributors towards the overall sector & market going higher, while most semiconductor and diversified communication companies have not fared well with concerns over a trade war with China. Also, in financial stocks, many of the banks have not performed over the past couple years thanks to a low interest rate environment along with increased cost and regulations while credit services which includes Visa, Mastercard and PayPal have been the bright spot in the financials this year thanks to increased consumer spending and household debt that has well surpassed 2008 levels. Even with strong corporate earnings and profits, investors will remain cautious of the political and economic headwinds and avoid any sectors or companies that have a greater chance of being affected by such issues around trade war and rising interest rates.

A little on Bonds

The 10-Year treasury yield hit a high back in September of 1981posting a yield of 15.8%. Since then we have been in an incredible long bull market for bonds with yields for the 10-Year treasury bottoming in the summer of 2016 around 1.5%. With the Federal Reserve expected to continue to raise the Fed Funds rate one more time this year and possibly three to four times next year, we do expect to see the market push up longer term rates through 2019.

In the past bond investors would be able to achieve positive annual returns even in rising interest rate environment because the interest payment received on most bonds were able to provide a high enough return to offset small price declines in the bonds. However, going forward that may not be the case since many bonds held by investors today offer such little interest due to the low rates following 2008. It has become increasingly more important for investors to be selective in the fixed income investments they hold during this time of rising yields. (Below is a chart showing the current returns in the bond indices and the affects rising rates could have on them)

Trump vs. China

The U.S economy continues to fire on all cylinders and the outlook for the rest of 2018 and the first half of 2019 remains bright. We continue to see industrial production capacity, robust employment numbers, stronger wage growth and    consumer confidence. We also still expect to benefit this quarter from the tax-cut effects and large federal spending increases expected throughout the rest of 2018. And even though the tariffs are on our mind, we could possibly benefit from front-loading effects in September and from a replenishment of inventories that were depleted back in the second quarter.

That said, looking further ahead, growth could likely slow in 2019 and beyond as tax-cut effects fade, inflation and interest rates continue rising and government spending slows. The other main risk is the now full-fledged trade war between China and the U.S. The U.S administration has agreed on a new trilateral agreement with Mexico and Canada which still could hit some snags if it cannot get passed by congress prior to the midterms. It would also be beneficial if it can get passed and signed prior to Mexico’s new administration that takes office on December 1st. With the dominos in line to fall as new deals with several nations become finalized, China may have no other choice but to sit down with the administration on term of a new trade deal. However, If the trade dispute continues, it could strike a heavy blow to both consumer spending, as well as to business investment and economic momentum amid heightened uncertainty of an outcome.