One of the biggest surprises of the last quarter is just how much confidence grew for pretty much everyone. The consumer confidence surveys spiked to the highest levels since the peak of the dot-com boom. Business confidence also rose to close to the highest levels of the past 20 years. U.S. markets went on a tear, with the major indices up between 7 percent and 10 percent.
The increase in confidence was and is well founded. Wage growth started to accelerate; job growth continued at very strong levels, to the point where there are now more openings than unemployed people; and corporate earnings rose at double-digit rates. Overall, the economic and financial news was good.
Even the Fed got on board. It used the word strong several times in its most recent statement, ratifying that sentiment by continuing to raise interest rates. As rates rise back to normal levels, the Fed clearly feels confident that the economy has moved back to normal as well.
With conditions in the U.S. so good, the dollar followed suit and rose in value. This is a sign of success, at least here. But abroad? It caused trouble. Emerging markets, which had borrowed heavily in dollars, now found themselves having to pay back much more than they had bargained for. This raised fears of another emerging markets crisis. A couple of countries do seem to be in trouble, but a systemic crisis was avoided.
The developed countries had a different set of problems, more political than economic. In Europe, Brexit continues to rattle markets. Further, Italy is seen as a growing risk due to the recently elected populist government, which threatens to revert to deficit spending. While developed economies continued to grow, the political issues limited market performance.
Trade was another key driver of international angst. Some of the headline issues were resolved during the quarter, notably with the recent U.S.-Mexico-Canada Agreement. But the biggest tariffs, those against China, actually took effect. From an economic and market standpoint, there has not yet been any impact. Still, the imposition of the tariffs is a big step that will show up in subsequent quarters.
At the end of the quarter, the Kavanaugh Supreme Court hearings took center stage—not only for their own drama but also as stage setting for the pending midterm elections. There was surprisingly little market reaction. In fact, U.S. markets rose close to all-time highs, which actually reflects the absence of political risk. The Supreme Court does not set interest rates or federal spending, and the midterms are likely to result in very little real change in policy or regulation. For all the headlines, the economic impact is likely to be minimal over time—and the markets last quarter reflected that.
Despite all of the highly charged news, both economic and political, the economy continued to move ahead strongly in the third quarter, and markets followed suit. As we move into the fourth quarter, that trend looks likely to continue. We will certainly see more dramatic headlines, both over U.S. politics and over trade and other policy initiatives. But the economic foundations remain solid and should continue to support the markets.