Major stock markets across the globe continued to rally higher in the third quarter of 2017. The S&P 500 Index generated total returns of 4.5%, propelled by strength in corporate earnings and favorable economic conditions. Developed and emerging international markets continue to show the strongest performance for the year-to-date period, which primarily reflects improving trends in most major foreign economies.

The table below shows the performance of major equity indices for various time periods.

Equity Performance for Periods Ending on September 30, 2017

Total Return Index Market Sector Quarter YTD 1-year 3-year 5-year 10-year
S&P 500 Large U.S. Companies 4.5% 14.2% 18.6% 10.8% 14.2% 7.4%
Russell 2000 Small U.S. Companies 5.7% 10.9% 20.7% 12.2% 13.8% 7.9%
MSCI EAFE Developed Int’l Markets 4.8% 17.2% 16.0% 2.3% 5.5% -1.5%
MSCI EM Emerging Int’l Markets 7.0% 25.4% 19.7% 2.5% 1.5% -1.1%

Both U.S. indices shown above (S&P 500 and Russell 2000) have produced double-digit returns for the current year and trailing one, three, and five-year periods. Only the 10-year period falls below long-term historical averages. It is worth pointing out that the pre-recession peak for the U.S. market was roughly 10 years ago on October 9, 2007. A person investing at the worst possible time—at the peak of the last bull market—still would have averaged more than 7% annual returns over the following 10-year period, despite enduring one of the most severe global recessions in history.

Of course, investing has significant risks associated with it. One of those risks is market volatility, a measure of security price fluctuation over time. Over the past year, the degree of market price volatility has been surprisingly muted. For instance, the S&P 500 Index has not had a single day in 2017 in which its value changed by 2% or more. This contrasts with the volatile years of 2008 and 2009, in which the index moved in excess of 2% on more than 50 days each year. According to Bespoke Investment Group, the average daily price move of the S&P 500 so far in 2017 has been just 0.31%, the second-lowest of any of year since 1928 (the lowest was in 1964). Daily price volatility is currently less than half the long-term average of 0.73%.

Measures of price volatility take into account both moves to the upside and downside. However, what really unnerves investors are significant market declines, which have been absent from recent performance. The S&P 500 has generated positive returns for eleven consecutive months and eight consecutive quarters. It has not had suffered a 5% decline since June 2016. This relatively steady climb higher has extended the current bull market (a period without a 20% decline) to more than eight years, the second-longest on record.

Markets usually react quickly (and sometimes irrationally) to economic news and world events. However, the current market has been unshakable, especially when considering the major news stories of the third quarter. The advancement of North Korea’s nuclear program, which included firing missiles over Japan, testing a hydrogen bomb, and exchanging threats with the U.S., had almost no discernable impact on stock prices. Three major hurricanes slammed into the U.S. causing significant human hardship and billions in damages, but they did not budge the markets. Lack of progress on the Trump Agenda, including failure to repeal Obamacare did not seem to faze equity investors.

While periods of low volatility and steadily rising markets are appealing to most investors, they can mean less attractive investment opportunities and fewer corrective forces in the market. To provide a historical perspective, the S&P 500 has had negative returns in 27% of the years since 1927. Corrections of 10% or more have averaged 1 every 1.8 years; corrections of 20% or more have averaged 1 every 4.5 years. Studies have shown it is futile to attempt to predict these corrections. Instead, by establishing an asset allocation policy with an appropriate mix of equity and fixed income investments, investors are able to withstand market corrections, and even benefit from them by purchasing equities at lower prices.

Fixed income investments remained stable through the third quarter with the yield on the 10-year Treasury bond virtually unchanged, rising from 2.31% to 2.33%. While the Fed did not raise the target range of its benchmark rate, it did announce its intention to begin reducing its $4.5 trillion balance sheet in October. This is consistent with its stated plan to allow rates to rise to more normal levels. Measures of U.S. inflation have held steady at approximately 1.9%. The average maturity of fixed income investments in our managed portfolios is relatively short, as we regard long-term fixed income investments as unattractive due to the risk related to rising interest rates. Total returns on the Bloomberg Barclays U.S. Aggregate Bond Index were 0.85% in the third quarter.

When markets are strong, we like to express a cautious tone, and in the same way, we are usually optimistic when things look bleak. Market cycles are difficult to forecast, but fortunately bull markets are longer than bear markets. We currently believe economic conditions are favorable for long-term investors. Interest rates remain low compared to historical levels, the corporate earnings outlook is positive, and stock valuations appear to be reasonable.

John D. Frankola, CFA

The author is the president of Vista Investment Management, LLC, a Registered Investment Advisory firm. Under no circumstances does this article represent a recommendation to buy or sell stocks. This article is intended to provide information and analysis regarding investments and is not a solicitation of any kind. References to historical market data are intended for informational purposes; past performance cannot be considered a guarantee of future performance. Neither the author nor Vista Investment Management, LLC has undertaken any responsibility to update any portion of this article in response to events which may transpire subsequent to its original publication date.