Coming to the close of the third quarter, volatility associated with the North Korean threat turned into a buying opportunity, just as it has for many years as the threat has zigzagged across the headlines.

THE GLOBAL UNDERPINNING FOR MARKETS
The Organization for Economic Cooperation and Development (OECD) has reported that the 45 countries it monitors are poised for growth in 2017. Nearly 73% of the countries will enjoy accelerated growth compared with a year ago. It constitutes a synchronized recovery, the first in almost 10 years. According to the OECD’s Economic Outlook released in June, “stronger business and consumer confidence, rising industrial production and recovering employment and trade flows will all contribute to an improvement in global GDP from 3.0% in 2016 to 3.6% in 2018.

The widely followed OECD composite of leading indicators from September 7th, “designed to anticipate turning points in economic activity relative to trend six to nine months ahead, continues to point to stable growth momentum in the OECD area as a whole.” The International Monetary Fund’s (IMF) World Economic Outlook Update, issued in July, agreed that the “pickup in global growth anticipated in the April World Economic Outlook remains on track, with global output projected to grow by 3.5% in 2017 and 3.6% in 2018.” Moreover, the report suggests that “The cyclical recovery continues” as the global economy maintains momentum.

With regard to the U.S. specifically, the Conference Board Leading Economic Index (LEI), which monitors the state of the U.S. economy by following 10 key components, including employment; manufacturers’ new orders; stock prices; building permits; consumer expectations; and interest rate spread, concludes in its latest report that while the economic impact of recent hurricanes is not fully reflected in the leading indicators yet, the underlying trends suggest that the current solid pace of growth should continue in the near term.

The synchronized growth supporting markets, coupled with still accommodative global monetary policy and low inflation, helps explain the upswing in positive global market performance. Federal Reserve Governor Lael Brainard discussed the recovery in a speech at the Economic Club of New York in early September: “We are seeing synchronized global economic growth for the first time in many years. Foreign economies—including Canada, the Euro area, and China—have posted robust GDP growth so far this year. This improvement has been reflected here at home in dollar depreciation; higher earnings and stock prices; tighter risk spreads; and an increase in net exports, which made a small positive contribution in the first half of this year after holding down GDP growth over the past several years.”

U.S. exports climbed by 6% on annualized basis in the first six months of 2017 as global demand gained strength. Not surprisingly, U.S. multinational companies enjoyed a boost as the weaker dollar helped bolster their performance.

THE FEDERAL RESERVE
In a widely anticipated move, the Federal Reserve announced on September 20th the winding down of its $4.5 trillion balance sheet. Chair Yellen assured investors that the balance sheet would decline “gradually and predictably.” At the same meeting, the Fed signaled with high probability that they would raise rates later this year despite concerns over persistently low inflation. Yellen explained that the “basic message here is U.S. economic performance has been good. The American people should feel the steps we have taken to normalize monetary policy are well justified given the very substantial progress we’ve seen in the economy.”

Fed officials also released their projections for rate increases over the next couple of years, with three hikes forecast for 2018, two in 2019 and one expected in 2020. Considering that the composition of the Federal Reserve Board of Governors, the Vice Chair, and most likely the Chair, will change, it isn’t likely that these projections will stand. In addition, as previous projections have been significantly altered due to the difficulties in forecasting long-range economic conditions, so too will projections be adjusted.

Following seven years of close to a 0% interest rate, the Fed began raising rates slowly and cautiously since December 2015. With unemployment at a 16-year low, and the economic backdrop solid, along with a positive earnings forecast and healthy financial conditions, the Fed’s indication of another rate move this year still has many investors concerned that the recovery could be stymied by tightening prematurely. With inflation still below the Fed’s preferred 2% level, Chair Yellen explained at the press conference following the meeting, “I can’t say I can easily point to a sufficient set of factors that explain this year why inflation has been low. It’s more of a mystery.”

Yellen’s explanations for stubbornly low inflation readings have included low energy prices, labor market spare capacity following the recession, the rising U.S. dollar that lowered import prices, and “transitory” factors such as lower costs for cellular phone plans and prescription drugs. Still, her rationale for continuing the slow, steady and gradual rate-hike cycle stems from her belief that even though inflation could continue below 2%, “which we need to take account of in monetary policy, monetary policy also operates with a lag and experience suggests that tightness in the labor market gradually and with a lag tends to push up wage and price inflation.” She cautioned that the Fed could not afford to allow the economy to overheat and then be forced to raise rates more quickly, which could lead to a recession.