Stocks and politics here and globally seem to be running in parallel realities. In the political sphere, news of some crisis or political impasse, either in the US or around the world, grab our attention almost daily. The inability of governments to successfully address many of these events or issues would seemingly have a negative impact on the economy, at least indirectly. Yet stocks continue to rise despite such news, driven by more mundane fundamentals like economic and earnings growth. Strong fundamentals have propelled US stocks up 4.5% for the quarter and 13.9% YTD. Developed and emerging market stocks are doing even better, as their economic recovery takes hold. International developed stocks are up 5.6% for the quarter and 19.1% YTD. Emerging markets, the asset class laggard for so many years, are now up 7.9% for the quarter and an eye popping 27.8% YTD.
In the US, economic fundamentals remain strong. Inflation, as measured by the personal consumption index less food and energy, rose a mere 1.3% annually ending in August, well below the Federal Reserve target of 2%. The unemployment rate fell to 4.2% in August. Although the Federal Reserve seems poised to raise short-term rates at some point, they remain cautious, not wanting to interfere with the long but relatively weak expansion. Because of this caution and fairly benign inflation, bond yields have inched up only slightly over the quarter for short- and long-term treasuries. The weakening dollar and increasing worldwide growth should have a positive impact on US exports and growth in the coming quarters.
Like the US, Europe has had its share of unresolved political issues, including stagnant Brexit talks and a Spanish constitutional crisis, spurred by independence aspirations of the province of Catalonia. The European economy, however, continues to strengthen. Unemployment has dropped to 9.1% from 9.9% last year. GDP across the European Union is growing at 2.3% annually and appears poised for continued growth as member economies recover from the last contraction. Commodity prices, led by heating oil and crude oil, increased in the double digits last quarter, which should help a number of developing economies.
As we meet and talk with clients, it is clear that most are anticipating some sort of correction in the near to medium term. Now is a good time to review the amount of risk you are taking as measured by the percent allocation in stocks. Christina and I are here to help you match your risk tolerance with your financial planning goals so that when the market downturn does occur, you will have continued confidence in your financial plan.
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