“October: This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August, and February.” — Mark Twain, Pudd’nhead Wilson
Whether or not one believes in the “October Effect,” investors can’t be blamed for giving it credence this year. Worries about trade, the Federal Reserve and global growth roiled the markets as the fourth quarter began. Even U.S. equities—which had roared through the third quarter as investors focused on positive economic data—succumbed to the selloff that gripped risk assets (Figure 1).
Market turbulence is likely to intensify as U.S. midterm elections approach and trade concerns persist. However, as Mark Twain observed, speculation is always dangerous. We believe it’s especially ill-advised when markets are volatile. The prospect of more turbulence may be discouraging for investors, but we see many opportunities for our active approaches, which are guided by fundamental research, our identification of long-term themes, and rigorous risk management. We believe investors will benefit by maintaining a diversified approach that includes equities, convertibles, fixed income and alternative strategies.
The U.S. economy looks set to continue on its growth trajectory for the next year, if not longer. Our positive outlook for the U.S. economy reflects many factors. Deregulation and tax reform have already provided a powerful wind in the sails for U.S. economic activity and corporate earnings, but we believe the full measure of these business-friendly policies has yet to be fully reflected in the economy. The banking sector is in good health and financial conditions have not become restrictive in the wake of Fed rate increases. Corporate earnings are robust, and business sentiment is upbeat. Employment data and consumer confidence are strong, and wage growth is subdued. Although the Fed’s Underlying Inflation Gauge indicates signs of pressure (which is not surprising at this stage of the economic cycle), the Personal Consumption Expenditures Index indicates that actual inflation is still contained. At current levels, PCE inflation is still below the Fed’s long-term target (Figure 2). While we are monitoring slowing auto sales and homebuilding data as well as recent increases in consumer loan delinquencies, we do not believe these measures warrant anxiety at present.