Quarterly Market and Economic Commentary

October 1st, 2019

The third quarter of 2019 started off in a bullish fashion for US stocks, with major stock market benchmarks hitting all-time highs driven by a strong jobs report and the anticipation of a rate cut by the Federal Reserve. Optimism was short-lived however, as even though we saw the first reduction of the Federal Funds rate in nearly a decade, post decision comments by Chairman Jerome Powell were received poorly, and shortly thereafter the trade conflict with China escalated once again as Trump announced an additional round of tariffs on Chinese goods. Investor concerns caused interest rates to turn sharply lower as demand for high quality fixed income assets rose significantly, causing the yield curve to invert which increased fears of a US recession. These events triggered what would end up being a 6% correction in the S&P 500 by the beginning of August and volatility was back with a vengeance. The skies cleared somewhat by the end of the quarter however, after another 25 basis point cut in the Federal Funds rate in September, and the announcement of a verbal agreement to reopen trade negotiations between the US and China calmed investors and provided some renewed hope.

Even with the volatility, U.S. large company stocks, measured by the commonly followed S&P 500 Index, experienced a modest gain of 1.70% for the quarter. U.S. small company stocks, which tend to be more economically sensitive, fell however with the Russell 2000 Index notching a loss of 2.40%. Foreign stocks also fell during the quarter, with developed and emerging markets equities losing 1.07% and 4.20% respectively. For the quarter, defensive sectors such as Real Estate, Utilities and Consumer Staples saw strong gains, while Energy, Healthcare and Consumer Cyclical sectors saw losses. Finally, bonds generally gained on the quarter, as falling interest rates pushed bond prices higher all along the yield curve. The Barclays US Aggregate Bond Index posted a gain of 2.27% for the quarter. * Source: Morningstar

Looking ahead, markets will continue to be laser focused on developments on global trade policy and corporate earnings. Both are expected to be strong drivers for the direction of stocks as they can offer some insight into the direction of the US economy going forward. Also, it is widely expected that the Federal Reserve will cut interest rates by another 25 basis points at the end of October, which should provide an additional tailwind for stocks, but it’s possible that markets may be pricing in more easing than the Fed will deliver. As a firm, we are optimistic about the final quarter of 2019. Even with the fears of a slowing economy, unemployment remains at historic lows, and a strong consumer can help push economic activity through a rough patch. Also, we believe tensions with China will soften in the months ahead, as President Trump looks to tone the rhetoric down ahead of the 2020 election. While impeachment risk remains a concern, and if it happens there would probably be an immediate drop in stock prices, we do not believe it would have a lasting affect and do not feel investment strategies should be modified to account for an unpredictable outcome of this nature.

All opinions and estimates included are as of the date listed and are subject to change without notice. This article is provided for informational purposes only. It is not intended as an offer or solicitation with respect to the purchase or sale of any security or offering of individual investment advice. The S&P 500 Index includes a representative sample of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is an unmanaged, market-weighted index of all over-the-counter common stocks traded on the National Association of Securities Dealers Automated Quotation System. The Barclays Capital U.S. Aggregate Index is a broad index representing the U.S. bond market. An investor cannot invest directly in an index. Past performance does not guarantee future results.
Following a difficult year for U.S. and International stock markets in 2018, accentuated by a swift and relatively severe correction in the fourth quarter, stocks turned and posted an impressive rally in January which carried through the quarter. Looking back, it is abundantly clear that the market reached an oversold condition in late December, but it was more than valuations that sparked the turnaround. The primary driver of the positive reversal turned out to be the same source that set off the correction in the first place … the Federal Reserve and Chairman Jerome Powell. In January, Mr. Powell communicated to the markets that the Fed’s previous plans to continue to raise the benchmark Federal Funds rate in 2019 would be placed on hold and acknowledged that patience would be prudent given market signals and the threat of a global economic slowdown taking hold. In addition, optimism over a potential trade deal with China helped support the rally, and while a deal had still not been reached by the end of the quarter, fears of a long and relentless trade war subsided greatly which led to improved investor sentiment.

U.S. large company stocks, measured by the commonly followed S&P 500 Index, gained 13.65% for the quarter, with half the gain coming in the month of January alone. U.S. small company stocks also experienced strong gains, with the Russell 2000 Index notching a gain of 14.60%. The NASDAQ composite index saw the largest gains during the quarter, increasing 16.81%, boosted by a strong recovery in the technology sector. On the international front, developed and emerging markets equities also recovered during the quarter with gains of 9.98% and 9.91% respectively. Finally, bonds generally saw gains, as a decline in interest rates pushed bond prices higher. The Barclays US Aggregate Bond Index posted a gain of 2.94% for the quarter. * Source: Morningstar

Looking ahead, with the Federal Reserve adopting a dovish stance on rates for the time being, the focus will turn to U.S. corporate earnings and a variety of economic data points. The U.S. economy has shown some signs of slowing, and recession fears have risen in recent months, particularly following a brief inversion of the yield curve in March, which has been known to be a semi-reliable predictor of past recessions. However, there has historically been a large gap in time between yield curve inversion and the subsequent recession, and not all inversions lead to a recession. In fact, the economy looks to be on stable footing and our outlook remains quite positive. Still, it’s something that bears watching. Corporate earnings and economic data reports in the second quarter will likely largely determine where we go from here, as well as further developments on global trade, particularly with China.

All opinions and estimates included are as of the date listed and are subject to change without notice. This article is provided for informational purposes only. It is not intended as an offer or solicitation with respect to the purchase or sale of any security or offering of individual investment advice. The S&P 500 Index includes a representative sample of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is an unmanaged, market-weighted index of all over-the-counter common stocks traded on the National Association of Securities Dealers Automated Quotation System. The Barclays Capital U.S. Aggregate Index is a broad index representing the U.S. bond market. An investor cannot invest directly in an index. Past performance does not guarantee future results.

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