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The financial markets advanced during the third quarter amidst continued anxiety surrounding trade deals and interest rates. The S&P 500 Total Return Index (“Index”) returned 1.7% during the third quarter. The Index is up 20.6% on a year-to-date basis through Sept. 30, 2019.

Within Talbot Financial clients’ portfolios, Technology and Consumer Discretionary were the best performing industry sectors for the third quarter and the year-to-date periods. Both sectors continue to meet our disciplined criterion of balance sheet strength, return of cash flow and long-term secular growth.

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The stock market extended its rally during the second quarter as tariff fears eased and the U.S. Federal Reserve (“Fed”) signaled a willingness to cut interest rates. For the quarter, the S&P 500 Total Return Index (“Index”) returned 4.3%. Year-to-date through June 30, 2019, the Index returned 18.5%.

Second quarter investment returns were led by the Financials and Technology sectors. Talbot Financial client portfolios were overweight both industry sectors relative to our benchmark Index. In the Financial sector, we particularly favor the strength of certain banks’ balance sheets and the material amount of capital these banks are returning to shareholders through dividends and share repurchases. In the Technology sector, our view remains that we are in the early innings of long-term secular technology advancement propelled by cloud-based computing.

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The financial markets posted a striking start to the year with the S&P 500 Total Return Index (“Index”) rising 13.6% during the first quarter of 2019. The primary driver of the first quarter rally was the recognition that central banks are more likely to hold interest rates low for an extended period. Perhaps the biggest shift occurred in the U.S., where the Federal Reserve (“Fed”) modified its stance to rate neutrality.

The first quarter Index return of 13.6% marked the strongest quarterly return since the third quarter of 2009. All 11 S&P industry sectors had positive returns for the quarter. The largest gains were in the Technology, Industrials and Consumer Discretionary sectors at 19.9%, 17.2% and 14.7%, respectively. The lowest sector returns during the quarter were in Healthcare and Financials at 6.7% and 8.6%, respectively.

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The stock market was rattled during the fourth quarter as investor sentiment over Fed tightening and tariff wars overshadowed solid economic data. The S&P 500 Total Return Index (“Index”) declined 13.5% for the fourth quarter. This decline erased positive market returns through the first three quarters of the year, resulting in the Index being down 4.4% for the full-year 2018.

Investors overreacted in the fourth quarter as our analysis suggests the economy remains on sound footing. Further, market corrections have often-times created favorable long-term investment opportunities through disruption and panic selling. Our belief is it essential to adhere to your investment philosophy and process during times of disruption. We must remember that the value of companies is based upon their ability to grow revenues and earnings over the long-term. Both the Fed tightening (i.e., increasing interest rates) and additional tariffs raised concerns about whether the U.S. economy will enter a recession. Our view is a U.S. recession is not on the horizon as evidenced by the strength of the U.S. economy, businesses and consumers.

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The financial news headlines in the third quarter featured macro-level themes such as trade wars, inflation and central bank interest rate decisions. Meanwhile, the continued strength of the U.S. economy and corporate earnings were the key relevant factors driving favorable investment returns during the third quarter.

Fortunately, for us as investors it is the fundamentals of the companies we own and the underlying condition of the economy that matter the most over the long-term, not the media rhetoric. As evidence, for the third quarter Talbot Financial’s benchmark index, the S&P Total Return Index (“Index”), increased 7.7%. Year-to-date, the Index was up 10.6% through Sept. 30, 2018.

Investment returns during the third quarter were led by Health Care, Industrials, Communication Services and Technology, all of which posted returns of greater than 8%. Materials, Energy, and Real Estate were the underperforming industry sectors.

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