Stocks Post Solid Q3 Gains, but Face Huge Q4 Obstacle

The major U.S. stock indexes finished mixed on Friday, but were still able to close the quarter with their best performances in years. The strong performance was posted despite concerns over an escalating trade dispute between the United States and China. The U.S. and Canada are still in negotiations which turned ugly last week. However, a new trade agreement with Mexico earlier in the quarter may be offsetting some of the worries.

Additionally, investors were able to set aside political turmoil in Washington as well as weakness in emerging markets. Higher crude oil prices, rising inflation and another Fed rate hike may have also weighed on performance, but these factors were offset by a strong labor market, rising average hourly earnings and a robust Gross Domestic Product report.

The strength was divided among strong performances in several sectors. Ultimately, despite all the aforementioned outside factors, strong sales and revenue as well as better-than-expected earnings provided the most support for equity prices.

Broad Market Quarterly Performance

During the just completed third quarter of 2018, the benchmark S&P 500 Index rose 7.2 percent. This was its best quarterly gain since the fourth quarter of 2013. The blue chip Dow Jones Industrial Average outperformed the S&P 500 Index with a 9.3 percent gain. The tech-based NASDAQ Composite posted a 7.1 percent quarterly gain, its best performance since first quarter 2017.

Sector Quarterly Performance

The broad market quarterly performance was sustained by strong performances in a handful of sectors. The best-performing sector of the third quarter was Health Care. It finished 14.1 percent higher, while posting its best quarterly gain since the first quarter of 2013. This was followed by industrials, which gained 9.7 percent and Technology, which rose 8.5 percent.

Earnings Performance

Stripping aside all of the headlines and fundamental events, earnings were primarily responsible for the quarter’s stellar gains. Stocks in all major indexes posted stronger-than-expected quarterly results.

Calendar second-quarter earnings for the S&P 500 rose 25 percent on a year-on-year basis, with 77.6 percent of companies topping analyst expectations, FactSet data showed.

Looking Ahead to the Fourth Quarter

Last quarter’s solid performance may have proved that investors aren’t too worried about rising inflation, higher crude oil prices, Federal Reserve rate hikes, and trade disputes. Or any other negative headlines put out there by the new services designed to discredit President Trump, derail the economy or essentially bring an end to the stock market rally.

However, the stakes will be a little higher in the fourth quarter. Not only will investors have to deal with lingering trade tensions with China and Canada, rising energy costs and another rate hike by the Fed in December, but they’ll also have to contend with uncertainty amid hotly anticipated mid-term elections in November.

Looking ahead, Democrats are expected to gain a majority in the House as well as increase their seat count in the Senate. This could delay, or even thwart, the Trump administration’s economic agenda.

Once again, we’re going to start another quarter with a huge wall of worry for investors to climb.