Third-Quarter GDP Preview

Investors’ first look at third-quarter gross domestic product (GDP) will be released on Friday, October 26. Based on the economic data and projections we’ve seen, the economy grew at a moderate to strong pace in the third quarter, with the Bloomberg-surveyed economists’ consensus at 3.4%. The benefits of fiscal stimulus, continued consumer strength, and improved business spending have powered the U.S. economy this year, and we’ll likely see largely the same general story for the third quarter, although business spending may be somewhat less robust. Both trade and extreme weather in parts of the country are expected
to have an impact on the number, increasing the likelihood of a surprise, with our bias to the upside. While we may not again achieve the near 5% growth seen in the second and third quarters of 2015, we think the expansion is durable at least into 2019—and possibly beyond—as the growing impact of deficit-financed stimulus and deregulation outpace headwinds from trade, slower global growth, and Federal Reserve (Fed) tightening.

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Earnings Update: So Far So Good

Earnings season off to a good start. Third quarter earnings season is rolling and, so far, results have been quite good overall, supported by strong U.S. economic growth, robust U.S. manufacturing activity, tax cuts, and big increases in energy and financials sector profits. Below we recap the results of earnings season thus far, discuss why we expect strong results to continue throughout the reporting season, and highlight several keys we are watching.

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LPL Government Relations Newsletter

Judy was featured in last month’s LPL Government Relations Newsletter. The commitment she has to her clients and firm is inspiring to her team!

“LPL Advisor, Judy VanArsdale with Lakeview Wealth Management, sits on the LPL PAC Advisory Board and has been an outspoken advocate on a variety of issues. Judy was even asked to testify before the House Ways and Means Subcommittee on Oversight at a hearing on the Department of Labor’s now invalidated fiduciary rule. Judy’s advocacy work is essential to LPL and our industry.”

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Benign Inflation Readings Support Fed’s Gradual Approach

Several new readings on inflation last week confirmed that price pressures remain manageable, supporting a continued gradual path of rate hikes for the Federal Reserve (Fed). With the unemployment rate near multi-decade lows and the economy growing well above the median Fed longer-term consensus rate of 1.8%, markets are growing increasingly sensitive to any inflation data that may put Fed rate hikes on an accelerated path. While inflation has normalized to near the Fed’s target of 2%, there are few signs of added pricing pressures appearing. We attribute this to the Fed’s gradual approach to tightening, which is likely contributing to overall inflation remaining well contained. The risk of inflation breaking to the upside, potentially fueled by factors such as economic growth, labor scarcity, and trade policy, needs to be monitored. However, recent inflation readings provide few signs that the economy is overheating.

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Perspective On Market Volatility

After several months of historic calm, stocks sold off sharply last week. Rising interest rates and trade war fears were cited as the primary causes of the sell-off that caused the Dow Jones Industrial Average to drop more than 1300 points on Wednesday and Thursday combined. Concerns about corporate profit margins peaking and a potentially overcrowded tech trade also likely played a role in upsetting a market that had been extraordinarily calm over the past six months. The S&P 500 Index did manage to pare losses, thanks to solid gains on Friday, but still ended the week down over 4%, for the worst week since March. Here we share some perspective on the latest bout of market volatility, which is not particularly unusual, and share our thoughts on where stocks may go from here.

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Global Economic Outlook: U.S. and EM Poised To Underpin Growth

Investors have been digesting a number of important global developments this year: fiscal stimulus, trade tensions, divergence in global policy and currencies, and political developments. As 2018 heads into the fourth quarter, we’ve put together what we believe these developments mean looking forward to 2019. Overall, we expect global growth to slow in 2019 but remain strong enough to continue to support the broad global economy and markets. The United States will continue to be the growth engine for developed markets, although we see some upside for Japan, but the front-loaded impact of fiscal stimulus is likely to fade somewhat. In the meantime, we expect some emerging market (EM) headwinds to fade, allowing EM economies to enjoy a stronger pace of growth than developed economies. We do expect China’s growth to slow, but it will likely
avoid a hard landing as the economy rebalances [Figure 1].

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Global Equity Market Outlook: Favor U.S.; Stick With Em

We continue to favor the United States and emerging markets (EM) over developed foreign markets for global equity allocations. We see the U.S. economy as the primary driver of our forecast for 3.8% global gross domestic product (GDP) growth in 2018, supported by new fiscal policies, while Europe and Japan may lag.* The United States remains a global earnings standout as well. Despite underperformance this year, we continue to see upside potential in EM due to attractive valuations, recent economic growth, favorable demographics, and the potential for resolution to the U.S.-China trade dispute later this year [Figure 1].

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The Dot Disconnect

The Federal Reserve (Fed) wrapped up its most recent monetary policy meeting on Wednesday, September 26. While the Fed raised its policy rate, as expected, the more important outcome was the Fed’s guidance on future policy through its statement, a new set of forecasts, and Fed Chair Jay Powell’s press conference after the meeting’s conclusion. The Fed walked a fine line between minimizing the possibility of a harmful pickup in inflation while emphasizing the strength of economic growth and the labor market. However, the market’s response shows the disconnect between the Fed’s and the market’s expectation for future policy is growing.

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Best Quarter For Stocks Since Q4 2013

Investors endured a flurry of trade headlines and emerging market turmoil in the third quarter, but that didn’t slow down U.S. stocks. The S&P 500 Index rose 7.2% during what has historically been the most volatile quarter of the year (7.7% including dividends), its biggest quarterly gain since the fourth quarter of 2013, its best performance in a third quarter since 2010, and the 11th gain in the past 12 quarters. It is also notable that the S&P 500 did not close up or down 1% on any day during the quarter, only the second time in history that feat has been accomplished during the usually volatile third quarter (1963 was the other time). Here we recap the third quarter and highlight some key factors for markets in the fourth quarter.

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