Third Quarter 2019 Market and Economic Review

Market Review

During the third quarter, financial markets became more volatile due to a myriad of concerns: a potential worldwide recession, unrest in Hong Kong, trade wars, and presidential politics, including the impeachment investigation.

The S&P 500 index, which tracks large U.S. companies, reached all-time highs during July, moving above the 3,000 mark for the first time in history thanks in large part to lower interest rates and earnings. August, however, was dominated by the fears mentioned above, resulting in over a 7% drop in the middle of the month with large up-and-down swings with each headline or tweet. September saw some recovery and less volatility, and, for the quarter, the S&P 500 finished up 1.2%.

Small companies experienced more of the volatility than large U.S. stocks. The Russell 2000 index, which tracks small U.S. companies, ended the third quarter down 2.46%. Small stocks followed a similar pattern to the S&P but sold off more severely in August and did not recover as well in September.

Many international markets were down as other countries depend on exports more than the U.S., and the overseas slowdown has been more severely impacted by tariff worries. Asia’s markets felt the greatest impact caused by protests in Hong Kong (and potential responses by the Chinese government). The widely followed and broad MSCI EAFE, which follows Europe, Asia, and the Far East, was down 1.07% for the quarter.

Turning to U.S. bonds, yields continued to fall in the third quarter. In August, yields fell as volatility in stocks increased demand for bonds and lowered the yields. The yield on the 10-Year U.S. Treasury stands at 1.69%. The national average for 30-year mortgages stands at 4.02%.

Below, you will find updated benchmark returns to compare a diversified portfolio.

2019 Quarter 3 Market Performance Benchmarks

* Each benchmark is allocated based on assumed Risk Profile of underlying indexes.

**Benchmarks include a mixture of ICE BofAML U.S. 3-month Treasury Bill Index, Barclays Global Aggregate Bond Index, Barclays U.S. Aggregate Bond Index, MSCI EAFE Index, and the Value Line Composite Index (Geometric). These benchmarks are the same as those in the Risk/Return and Account Analytics sections of client quarterly performance reports. By comparing your portfolio’s return to the benchmark with the closest risk/return characteristics, you get a more accurate reading of portfolio performance than using a less diversified benchmark, such as the S&P 500 index.

Economic Review

According to the final GDP reading, the U.S. economy grew in the second quarter of 2019 at 2.0 percent. This is slower than the strong 3.1 percent experienced in the first quarter. Economists and the market anticipated this slowing.

U.S. manufacturers joined the worldwide slowdown during the quarter. Readings from manufacturers in Japan and Europe are already showing contraction. Services and consumers continue to be a positive influence in the U.S. economy, but the latest numbers indicate some weakening in those indicators, as well.

The Federal Reserve responded with what one member labeled as a “preventative measure” by cutting rates by 0.25% in both July and August. The hope is to keep the economy out of recession and to “normalize the yield curve.”

In Europe, the European Central Bank (ECB) also responded to the weaker economic outlook by cutting interest rates, driving their rates further into negative territory. The ECB also restarted quantitative easing and are continuing with asset purchases.

In the UK, Brexit uncertainty continued, with Parliament passing legislation that will force the government to ask for an extension if it can’t agree on a deal with the EU. The prime minister suspended Parliament, only for the suspension to be overruled in court. A highly unpredictable election remains the most likely outcome if a deal cannot be reached by the October deadline.

In Japan, the consumption tax hike was imposed, creating a risk to an economy that is already feeling the effects of the global slowdown in manufacturing. Faced with these risks, Japanese consumer confidence continued to decline this quarter.

China’s economy continued to slow, with industrial production growing at 4.4%, down from around 7% last year. Retail sales also slowed, to 7.5% from close to 10% last year.

While domestic and global growth has slowed, keep in mind that unemployment is close to a 50-year low. We have not experienced a “bubble” in tech stocks, real estate, or other asset classes. Inflation is stable, and interest rates are relatively low. There are plenty of positive economic trends, even with rising levels of uncertainty.

We will continue to monitor the impact of tariffs, trade talks, interest rates, and investigations as we invest and monitor our clients’ portfolios.