Penobscot Newsletter for 3rd Quarter 2017
|Stocks (Total Return)||Closing Price||Third Quarter||1 Year||3 Years (Annualized)||5 Years (Annualized)|
|Dow Jones Industrial Average||22405||5.6%||25.5%||12.4%||13.6%|
|Standard & Poor 500 Index||2519||4.5%||18.6%||10.8%||14.2%|
|Barclay's Capital Aggregate Bond Index||0.4%||-0.7%||1.7%||1.1%|
(Sources: FT Interactive Data, WSJ, S&P 500; Past performance is not indicative of future results.)
The stock market continued its record run during the third quarter of this year. The S&P 500 added another 4.5% bringing the one year gain to 18.6%. And the gains were broad; of the eleven sectors in the S&P, only one, consumer staples, fell during the past quarter. Perhaps the most remarkable thing about this steady march higher is that it’s happening in the face of a number of potential disruptions.
In just the last three months we have seen historic natural disasters – three massive hurricanes from which we still don’t know the full economic impact – as well as geopolitical sabre rattling from North Korea. In Washington, the dysfunction continues with the Republican’s attempt to repeal and replace the Affordable Care Act failing for the third time. This inability to find common ground does not bode well for the all-important tax reform package which most analysts consider key to driving future growth and justifying the market’s optimism.
And yet, volatility remains historically low. In the second-to-last week of September, amidst all the aforementioned disruptions, the S&P moved in a range of 0.5% which according to the Wall Street Journal is the lowest percentage move in 45 years.
An obvious explanation is that, despite the disruptions, the market has, in many ways, the wind at its back. Interest rates remain historically low, and corporate earnings and economic growth have been reasonably strong. But here’s another idea: while the current climate of political, geopolitical and social tensions seem remarkably high, in the context of history, it’s not unprecedented.
If you look back fifty years to 1967, Vietnam War protests erupted all over the country as the U.S. launched its largest airborne assault since World War II. In the Middle East, Israel fought and won the Six Day War and here at home, race riots destroyed parts of Detroit resulting in 7,000 National Guardsmen being called in to restore order.
Fifty years before that, in 1917, America formally entered World War I after a number of unprovoked attacks on unarmed passenger and merchant ships by the Germans. Meanwhile the Russian Revolution began led by Lenin and in Washington, women picketed for the right to vote.
And back another fifty years, in 1867, the country was grappling with Reconstruction and how to unite the States and recover from the fracture and damage of the Civil War.
History by no means explains everything, but it can be helpful to reflect on where the nation has been when things seem as uncertain as they do now. In the meantime, we think the current economic climate continues to favor high-quality dividend-paying securities. We are cautious as valuations are high, but corporate earnings remain solid and if tax reform is successful, it could lead to stronger economic growth in the years ahead.
As always, we welcome your questions and comments.