Cue the theme from Rocky.

U.S. stocks in the third quarter of 2018 knocked out the major contenders, defying the bears who bet against Wall Street. Compared to other world markets, the USA was champ.

I’ll review the third quarter that ended last Friday, with an eye on what lies ahead. But first, a quick re-cap of today’s market action.

The major indices closed mostly higher today, starting the fourth quarter on a strong note. Impetus for Wall Street’s ascent was the unexpected resolution yesterday of negotiations over the North American Free Trade Agreement (NAFTA).

The Dow Jones Industrial Average and S&P 500 sharply rose; the tech-heavy Nasdaq was dragged lower by lingering privacy concerns over social media. Facebook (NSDQ: FB) slid 1.23% today.

The U.S. and Canada reached a deal Sunday on NAFTA, keeping the trilateral pact intact. The two countries had engaged in contentious talks for several months.

Among the major concessions, Canada agreed to loosen protections on its dairy industry and the U.S. promised that Canada would be protected from threatened auto tariffs. The deal builds on an agreement that the White House already reached with Mexico.

Punching its way through…

The NAFTA conflict was resolved last night at literally the 11^th hour, only minutes before a self-imposed midnight deadline.

To be sure, headline risk was daunting throughout the July-September period.

Tariff battles escalated, Washington descended into further disarray, and indebted emerging markets wobbled. But the U.S. stock market counter-punched its way through. Tax cuts, strong earnings and economic growth outweighed the negatives.

The third quarter was a repeat of 2017: steady gains and low volatility. All three major U.S. indices hit record highs. The S&P’s gain in the third quarter was its biggest such advance since the fourth quarter of 2013.

Both the S&P and the Dow have moved higher in 11 of the past 12 quarters; the Nasdaq posted its ninth straight quarterly gain.

The following chart vindicates the bulls:

The top three sector performers in the third quarter were health care (14%), industrials (9.5%), and information technology (8.5%).

The three worst sector performers were real estate (-0.02%), materials (-0.1%), and utilities (1.5%).

Other regions around the world didn’t fare as well. The Stoxx Europe 600 Index gained a paltry 0.9%, the Hang Seng Index fell 4%, the Shanghai Stock Exchange lost 5.5%, and the benchmark Vanguard FTSE Emerging Markets ETF (VMO) fell 2.8%.

China’s Shanghai exchange stumbled as tariffs exacted damage. Political uncertainty in the European Union, especially over Brexit negotiations and Italy’s massive budget deficit, weighed on European stocks. Emerging markets, such as Turkey, Argentina, Indonesia, and Brazil, grappled with multiple economic and currency crises.

Commodities demonstrated weakness in the third quarter. Gold fell 4.6%, silver fell 9.2%, and crude fell 0.9%.

Crude oil may have dipped in the quarter, but it remains higher for the year. West Texas Intermediate today soared 3.18% to close at $75.58 per barrel; Brent North Sea crude climbed 2.85% to close at $85.09/bbl. Reports that Russia wouldn’t be able to supplant lost Iranian supply cheered energy investors.

Fixed income assets moved mostly lower throughout the third quarter, due to expectations that the Federal Reserve would continue its policy of monetary tightening. Longer-dated bonds posted the weakest performance.

The central bank’s policy-making Federal Open Market Committee (FOMC) raised rates at its meeting last week; the FOMC is expected to hike them again in December.

The bear slumbers…

Judging by the stock market’s robust performance today and throughout the third quarter, Wall Street has a message for the bears: stay in hibernation.

Conditions for stocks are expected to remain bullish.

For the third quarter, the estimated year-over-year blended earnings growth rate for the S&P 500 is 19.9%, according to research firm FactSet. The estimated revenue growth rate is 7.5%. All 11 S&P 500 sectors are expected to report year-over-year growth in earnings and revenue.

If 19.9% is the actual earnings growth rate for the third quarter, it will mark the third highest earnings growth since the third quarter of 2010, which came in at 34.1%.

However, a profit slowdown looms. Earnings growth for the first half of 2019 is projected to drop into the single digits.

The troubles that beset the world in the third quarter threaten to spill over into U.S. markets. Wall Street has shown complacency over the trade war, but tariffs are producing a cumulative effect.

China’s economic growth already is suffering because of tariffs, the European Union is growing politically fractious, and emerging markets are wrestling with multiple financial crises. The global economy is interdependent; America is not immune to these headwinds.

Stay cautious. Reigning champs can always be toppled.

Monday Market Wrap

• DJIA: 26,651.21 +192.90 (0.73%)
  
• S&P 500: 2,924.59 +10.61 (0.36%)
  
• Nasdaq: 8.037.30 -9.05 (0.11%)
  

Monday’s Big Gainers

• Jones Energy (NYSE: JONE) +11.83%

Rising oil prices lift energy producer.

• Cango (NYSE: CANG) +9.44%

Analysts turn bullish on automotive transaction platform.

• General Electric (NYSE: GE) +7.09%

Struggling industrial conglomerate replaces CEO.

Monday’s Big Decliners

• AVROBIO (NSDQ: AVRO) -51.55%

Wall Street skeptical of biotech’s drug pipeline.

• Ryanair Holdings (NSDQ: RYAAY) -15.73%

Air carrier slashes full-year guidance.

•  Infinera (NSDQ: INFN) -15.41%

Telecom equipment maker on verge of losing major customer.

Letters to the Editor

“Are fast food chains still good investments?” — Gerry B.

Falling unemployment and continuing economic recovery are tailwinds for restaurant chains. Fast food generally remains popular but it’s losing market share to an up-and-coming style of restaurant called “fast casual,” which lies in-between hamburger joints and formal eateries. This niche is your best bet for restaurant sector growth.

Questions about sector investing? Drop me a line: mailbag@investingdaily.com

John Persinos is the managing editor of Investing Daily.