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crude oil being pumped from field

A surge in oil prices helped propel energy stocks to their best month of the year, as the Energy sector of the S&P 500 moved up 9.94% in September. The price of West Texas Intermediate (WTI) oil climbed 9.40% for the month due to growing demand – from $47.23 per barrel at the end of August to $51.67 at the September close.

Gasoline prices also spiked during September as Hurricane Harvey caused the shut-down of a number of refineries in the Houston area. But most of those refineries have reopened, pushing gasoline prices back down toward pre-hurricane levels.

Devastation from Hurricanes Harvey, Irma and Maria (in Puerto Rico) will take months or years to rebuild. Economists have cut estimates for 3rd quarter gross domestic product (GDP) growth by around 0.5%, with consensus estimates now calling for about 2.5% growth.

However, while hurricanes can erode wealth in the short term, they can spur economic activity in the long run as the affected areas recover. GDP growth is expected to rebound in the 4th quarter as billions of dollars are injected into the rebuilding phase. (See: The Economic Impact of Hurricanes Harvey and Irma)

Here are some highlights from the month covered in more detail later in this report:

  • Stocks still sluggish. Stocks moved up slowly but steadily in the 3rd quarter, with the S&P 500 having a gain for the period of 3.96%.
  • Retail sales disappoint. Retail sales were down 0.2% in August, according to the U.S. Department of Commerce.
  • Employment growth continues. Employers added 156,000 new jobs in August following 189,000 new jobs in July, according to the U.S. Bureau of Labor Statistics Employment Situation Report September 1.

Is apathy driving down savings rates? Find out in our 4th Quarter Market Outlook from our Chief Investment Officer – and see what we expect from the economy and the markets in the weeks and months ahead.

In a Nutshell Chart

Drilling Down

U.S. Stocks Edge Up

The S&P 500 was up slightly in September, from 2471.65 on August 31 to 2519.36 at the September close – a 1.93% gain for the month and a 12.53% gain for the year. The total return of the index was 2.06% for September, 4.48% for the 3rd quarter, and 14.24% for the year.

The NASDAQ ended the 3rd quarter at 6,495.96, which represented a 1.05% gain for September, a 5.79% gain for the 3rd quarter, and a 20.67% gain for the year.

S&P 500 Index

Retail Sales Take a Hit

Retail sales were disappointing in August, down 0.2% for the month, according to the September 15 retail sales report from the U.S. Department of Commerce. Sales growth for July was also cut in half, revised down from a 0.6% increase from the previous month to 0.3%.

Downward pressure on retail sales last month was not surprising, considering the disruption caused by Hurricane Harvey in Texas. We could see the same effect in next month’s retail report due to Hurricane Irma in Florida. (See: The Economic Impact of Hurricanes Harvey and Irma)

However, in the coming months, we would expect retail sales to improve as home and business owners in the affected areas recover from the storm damage. Look for a pick-up in sales for products such as building materials, household goods, appliances, autos and auto parts.

Employment Keeps Climbing

Employment grew modestly the past two months, increasing by 189,000 jobs in July and 156,000 in August, marking 83 consecutive months of job growth, according to the U.S. Bureau of Labor Statistics Employment Situation Report on September 1. (See: Employers Add 156,000 New Jobs in August)

Employment is expected to continue to grow in the 4th quarter despite the historically low 4.4% unemployment rate. Recent surveys by the Philadelphia Federal Reserve have shown that businesses are interested in adding staff, but finding qualified workers has become a serious obstacle. As companies compete for qualified employees, that could help drive wage growth.

Sector Returns

The Energy sector was the leading sector of the S&P 500 during September, up 9.94%. But it has been the worst performing sector this year, down 6.63% in 2017.

Other leading sectors for the month included Financials, Industrials, Materials, and Telecom Services.

Leading sectors for the year include Information Technology, up 27.36%, and Health Care, up 20.31%.

The chart below shows the results for all 11 sectors:

S&P 500 Sectors

Bond Yields Sagging

Market interest rates on 10-year U.S. Treasuries recovered in September to 2.33% after dipping to just 2.12% at the August close. However, the rate is still below the 2.44% yield at the end of 2016 – despite two rate hikes by the Federal Reserve this year. (See: Fed Hikes Rates for Second Time This Year)

US Treasury 10 Year Bond Yields

Equity Earnings Edge Up

The consensus 12-month forward earnings estimate for the S&P 500 moved up 2.0% the past quarter, from $139.25 at the close of the 2nd quarter to $142.08 at the end of the 3rd quarter. For the year, earnings estimates are up 6.9% from the 2016 closing estimate of $132.83.

S&P 500 Index - Foward 12 Month Earnings Per Aggregate Share

As the graph below illustrates, the forward 12-month price-earnings ratio (P/E) for the S&P 500 ended the 3rd quarter at 17.8 – a slight increase from the 17.5 P/E at the end of the 2nd quarter. The P/E closed 2016 at 16.9, but quickly moved up to 17.6 at the close of the first quarter of 2017 – and has remained in the same range throughout most of this year.

S&P 500 Index - Price/Earnings Ratio

The forward 12 months earnings yield for the S&P 500, which is the inverse of the P/E, ended the quarter at 5.68%, which was down slightly from the 5.75% yield from the 2nd quarter and the 5.93% yield at the close of 2016.

S&P 500 - Earnings Yield

These two factors (P/E and earnings yield) – which have changed very little over the past quarter – indicate that stock values have remained fairly steady relative to earnings. Although estimated corporate earnings have gone up only 2% for the quarter, the overall market has also edged up slowly, keeping the P/E in check. But the current 17.8 PE is still near the seven-year high, and about 3% above the historic average.

The 12-month forward earnings yield can be helpful in comparing stock earnings yields with current bond yields. At 5.64%, the equity earnings yield is still significantly higher than the 2.33% market rate of U.S. Treasuries, but that gap has narrowed by about 1% since bond yields hit their low mark in July 2016.

Dollar Makes Slight Rebound versus Euro and Yen

After a weak year for the U.S. dollar versus other major global currencies, the dollar rebounded slightly versus both the Euro and the Japanese Yen during the past month. For the month, the dollar gained 0.56% versus the Euro. But for the year, the Euro is still up 12.08% versus the dollar.

Euro/US dollar exchange rate

The dollar gained 2.28% versus the Yen in September, but is still down 3.49% for the year versus the Yen.

US Dollar/Japanese Yen Exchange Rate

Oil Bounces Back

Oil prices moved up 9.40% in September, from $47.23 per barrel (WTI) at the close of August to $51.67 at the end of September as global demand picked up. The rebound in oil prices has been a process of fits and starts, with oil making an occasional surge, soon followed by a relapse in prices. If demand continues to grow, prices should stabilize above $50 a barrel, but the price volatility will likely continue.

Price of Oil - west Texas Intermediate

Gold Prices Retreat

After a strong July and August, gold prices retreated in September, dropping 2.8% from the August close of $1,322.20 per ounce to $1284.80 at the end of September. It was the worst month for gold in 2017. However, gold prices are still up 11.6% for the year from the 2016 closing price of $1,151.70.

Price of Gold

International Equities Move Back Up

After a slight dip in August, the international stock market trended back up in September. The MSCI EAFE Index, which closed the month at 1,973.81, was up 2.23% from its August close of 1930.82. The MSCI EAFE was up 4.81% for the 3rd quarter and up 17.21% for all of 2017.

MSCI EAFE Index

Is apathy driving down savings rates? Find out in our 4th Quarter Market Outlook from our Chief Investment Officer – and see what we expect from the economy and the markets in the weeks and months ahead.

 

To see our Market Recaps every month and learn more about our perspective on the markets, the economy, and investing, subscribe to our Investing Insights newsletter.

Media contact: Callie Briese, 612-844-7340; callie.briese@thrivent.com

 

 

All information and representations herein are as of 10/1/17, unless otherwise noted.

The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Thrivent Asset Management associates. Actual investment decisions made by Thrivent Asset Management will not necessarily reflect the views expressed. This information should not be considered investment advice or a recommendation of any particular security, strategy or product. Past performance is not a guarantee of future results.  Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon, and risk tolerance.

Indexes are unmanaged and do not reflect the fees and expenses associated with active management. Investments cannot be made directly into an index.

The S&P 500® Index is a market-cap weighted index that represents the average performance of a group of 500 large-capitalization stocks.

The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange (NYSE) and the NASDAQ.

The NASDAQ (National Association of Securities Dealers Automated Quotations) is an electronic stock exchange with more than 3,300 company listings.

The MSCI EAFE Index measures developed-economy stocks in Europe, Australasia and the Far East.

West Texas Intermediate (WTI) is a grade of crude oil used as a benchmark in oil pricing.

Performance data cited represents past performance and should not be viewed as an indication of future results. Current performance may be lower or higher than the performance data quoted.

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