The nine-year stock market rally continued to hit all-time highs throughout the 3rd quarter of 2018. Booming economic growth coupled with a run of strong corporate profits supported stock prices in the U.S. The stock market's rise coincided with a pause in the climb of the U.S. dollar as well as a recent spike in government-bond yields. The ten-year treasury topped 3% again earlier this month. While trade disputes continue between the U.S. and China, the eurozone and emerging market economies are primarily bearing the current brunt of the tariffs.
Analysts generally credit the boom in U.S. corporate profits to the tax overhaul passed last year. The tax legislation included a cut to the corporate tax rate, which sent profits sharply higher through the first two quarters of the year. Recent projections show third-quarter earnings to also be robust. The S&P 500* companies are on pace to boost earnings 20% from the prior year, which would be the third-fastest quarterly growth rate in history. However, despite the increase in corporate profits, wages have seen only a slight increase in 2018. Nevertheless, the U.S. stock market seems poised to keep climbing as anxieties over inflation and trade wars may be dampening.
Backed by strong economic growth, the Federal Reserve increased its benchmark interest rate a quarter point on Wednesday. This was widely expected and policymakers anticipate another increase before the end of the year. In the latest installment of their quarterly projections, the Fed estimated gross domestic product to rise over 3% for the year. This is an upward revision from their projections back in June. Consequently, the committee released a statement finally dropping prior language that "the stance of monetary policy remains accommodative". The removed language provides an important signal that their aggressive monetary policy, which helped stimulate the economy after the financial crisis, is finally ending.
However, the positive reports on the U.S. economy are not catching on around the the world. The international indexes have struggled in 2018 due to a decline in economic expansion and the presence of a stronger dollar. The eurozone's economy continued its slowdown in September from a reduction in global demand on their exports. Much of the eurozone's struggles have been concentrated in the manufacturing sector, with export orders failing to grow for the first time since June 2013.
Earlier this month, the Organization for Economic Cooperation and Development lowered its eurozone growth forecasts for both 2018 and 2019. Unlike the U.S., the uncertainty about future trade relations between the U.S. and countries around the globe is putting pressure on Europe and emerging market economies.
For individual investors, navigating stock market fluctuations represents only one aspect of building a sound retirement plan. The goal of maintaining a similar lifestyle when your career concludes is becoming increasingly complicated, especially as life expectancy grows longer. Rising health and long-term care costs and the threat that reduced social security benefits could be looming in the future, further compound the challenge of preserving your lifestyle.
It is essential to start planning now for your future no matter your age. There are many methods to consider when projecting your retirement needs such as a GAP analysis, the 4% withdrawal strategy or even the percentage of income calculation. A short exercise in estimating your future assets could help make a huge difference in understanding whether you may have a savings shortfall in the future. More importantly, it could also motivate you to invest more now and take advantage of compounding interest.
As Albert Einstein once stated, compounding is "the most powerful force in the universe".