What Investors Can Expect In Q4

October marks the beginning of the calendar fourth quarter. Investors have been on a wild ride in 2018, but U.S. stocks have performed well overall. However, a lot could change in three months time.

Key Themes

Russell Investments recently outlined what it sees as the key themes and catalysts for investors to watch in Q4. At the top of the list of market themes are the international trade wars, the U.S. Federal Reserve, China’s economic stimulus and the strength of the U.S. dollar. Russell said in its outlook there's a low risk of a U.S. recession, and Europe also appears poised for improving growth.

China and other emerging markets have been major weak spots in recent months. Russell said EM stocks are oversold, but the ongoing trade war may prevent a bounce-back in the near-term.

U.S. Earnings Slowdown

The U.S. economy is firing on all cylinders, but Russell said the 9-percent year-to-date rally in the S&P 500 is finally triggering some overbought indicators in the U.S. market. In addition, Russell said U.S. companies have an exceedingly high bar to clear to beat earnings expectations in the third and fourth quarters. At the same time, borrowing costs and wages are marching steadily higher, creating an earnings headwind.

“A slowdown in earnings growth will take away one of the main supports for U.S. outperformance relative to other markets,” Russell said in the report.

Other Asset Classes

For the first time in a long time, Russell said fixed income investments are starting to look appealing as well, especially the 10-year U.S. Treasury rate of around 3 percent.

On the currency front, Russell said there will likely be more upward pressure on the U.S. dollar in 2019, but the Japanese yen is currently 20 percent undervalued relative to purchasing power parity.

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