Investment Management – Third Quarter 2018

October 18, 2018

In baseball parlance, the seventh inning stretch is a tradition in which fans stand up in the middle of the seventh inning and stretch after sitting through 6½ innings of a game. Some teams, such as the Chicago Cubs, have made it an experience as fans sing along with Bill Murray to “Take Me Out to the Ballgame.” In financial markets, pundits love to use sports analogies when gauging the length and durability of an economic cycle – with baseball probably being the most overused.

Our current outlook for the economy is strong, though after ten years, there are indications that we are in the later innings of this expansion. Should the cycle last longer, already a record expansion, it may mean that the economy is playing in “extra innings.” For example, another round of fiscal stimulus, such as a substantial infrastructure bill, could extend growth for a few additional years. What we do know, is that the future is uncertain and no one knows when this cycle will eventually end.

Over the last three months, stocks rallied as companies reported better-than-expected second quarter earnings. The total return for the large capitalization S&P 500 was 7.71%. Mid and small capitalization stocks, tracked by the S&P 400 and S&P 600, returned 3.86% and 4.71%, respectively. International indices continued to lag domestic ones, with the MSCI EAFE index rising only 1.35%. In July, we reassessed our view on international and emerging markets, reducing exposure to those asset classes in favor of maintaining a bias to strong earnings growth in the U.S.