Despite continuing political tensions and bitter disagreements over trade policy, equity markets delivered strong performance in the third quarter of 2018. At the macro level, economic conditions remain excellent, with growing earnings, improved sentiment, and robust job growth. Large-cap stocks in the S&P 500 gained +7.7% for the quarter and are up +10.6% year to date. Small-cap stocks, represented by the S&P 600, gained +4.7% in the third quarter. As expected, the Federal Reserve (Fed) continued its policy of gradual short-term interest-rate hikes, but this did little to dampen equity-market enthusiasm.

Unlike the second quarter, developed-market international stocks also had positive returns. The MSCI Europe, Australasia, and Far East (EAFE) Index gained +1.4% for the third quarter but was still modestly negative for the year. Emerging-market stocks were down 1.1% for the quarter.

Bonds were again flat for the quarter, despite additional rate hikes by the Fed. The Bloomberg Barclays U.S. Aggregate Bond Index finished where it started three months ago. For the year, bonds remained down 1.6%. The yield curve remains relatively flat as inflation expectations continued to be muted.

The Financial Engines perspective.

The third quarter had no shortage of newsworthy events. An escalating trade war with China dominated economic headlines, although its effect on the economy has been modest so far. The record bull market in equities continues, but for how long, no one can be sure. A contentious midterm election is on the horizon, and any number of events could trigger new market volatility. Maintaining a broadly diversified portfolio is crucial to achieving your long-term goals and protecting against unexpected market moves.

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