At the end of the Third Quarter of 2019 the US stock market held onto its double digit annual gain as the Fed cut rates and the China trade saga continues.
The US Stock Market is just a hair shy of its all-time high reached on July 26th, 2019 but if you look at the performance over the past year, it has moved a paltry 2.9%, mostly as a result of the selloff in stocks toward the end of 2018. Global stocks are also nicely positive for the year but were down slightly for the quarter.
The Bloomberg Barclays US Aggregate Bond Index shows that bond prices also performed well for the quarter and the year as interest rates have come down. The Barclays US Aggregate bond index was up 2.27% for the quarter and 8.52% for the year.
Interestingly, the same news events that dominated the second quarter continued to dominate the third quarter, but there were some twists. Once again, there were two main themes that kept influencing the markets: hopes of a trade truce between the U.S. and China and a decided shift by the Federal Reserve with respect to short-term rates.
During the third quarter, investors saw:
• On July 31st, the Federal Reserve cut rates for the first time since 2008;
• On August 5th, the DJIA suffered its worst trading day of the year;
• On August 14th, the 30-year Treasury yield hit a record low;
• On September 16th, Brent crude oil had its biggest one-day gain;
• On September 18th, the Federal Reserve cut rates for the second time this year; and
• On September 30th, both the S&P 500 and DJIA posted their best three-quarter starts to the year since 1997 and NASDAQ posted its best three-quarter start since 2013.
The Fed Cut Rates as Anticipated
The Fed cut rates for the first time since 2008 and then cut rates again in September. Yet, the rate cuts did not exactly catch Wall Street by surprise, as the fed funds futures market pointed to a 100% chance of an easing of monetary policy for most of the month preceding the first rate-cut.
Overall the decision proved to be ineffective in my opinion as it had little effect on the yield curve domestically. The good news is the global yield curve is still positive meaning that banks can borrow globally at low rates and lend at higher rates, making a profit. A steeper yield curve is important because it gives an incentive for banks to lend. Banks make profits on the difference between the rate they borrow money (short term rates) and the rate they lend money (long term rates). So the greater the spread, the greater the potential profit, therefore motivating banks to lend to small businesses and individuals which helps to stimulate the economy.
Asset Class & Style Performance
The third quarter saw large cap growth stocks continue to outperform in most markets for the year and for the quarter. The exception was international developed stocks where small cap outperformed for the quarter however large growth stocks still have been outperforming for the year. We will continue to monitor these trends.
The U.S. and China
The investing world continued to feel the tensions between the U.S. and China throughout the quarter, as it has since the summer of 2018. Traders were bombarded with news about the U.S. and China trade dispute and the news was as clear as mud.
For example:
• Investors cheered Treasury Secretary Steven Mnuchin’s announcement that trade talks with China were set to resume in early October and when China announced new waivers for imports of U.S. soybeans.
• Within 24 hours, however, President Trump told the United Nations of China’s “theft of intellectual property and also trade secrets on a grand scale” while pledging that he would “not accept a bad deal.”
• Then within 24 hours after that, President Trump told reporters that a truce with China might happen “sooner than you think.”
Then 48 hours later, traders grimaced when news trickled out that the White House was considering restricting U.S. investment in China and forcing U.S. exchanges to delist shares of Chinese companies. Not surprisingly, shares in many Chinese companies dropped sharply. Expect announcements to teeter back and forth but also keep in mind that as I’ve said in the past while the tariffs are not good overall, I believe they lack the power by themselves to derail the global economy pushing it into a recession. What is still unclear is if this tariff strategy will end up benefiting one side or the other in the long run or if it ends up doing more harm than good.
House Democrats Move to Impeachment Inquiries
House Democrats moved toward a formal impeachment inquiry of President Trump and most pundits expect that the investigations into President Trump are likely to continue through the 2020 elections. It is still uncertain what impact these investigations will have on the stock market or the elections. Prior impeachment proceeding and their impact on stocks are spotty. Watergate occurred just before the 73-74 bear market however many economist attribute this bear market to the Arab-Israeli conflict and the following OPEC oil embargo. The Clinton impeachment was at the tail end of one of the longest bull markets in history with a bear market starting roughly a year later. In this case as well, many economist attribute this bear market to be cause by extreme valuations in technology and internet company stocks.
The fear amongst conservatives is a Trump impeachment will derail a republican pro-business agenda. At least that’s the worry. For democrats they would welcome the change in the White House.
Tug a War
The market can be seen as a tug a war between the bulls on one side and the bear on the other. While fears of an impeachment and China trade bubble often get the most press here are positives that get little attention.
• Unemployment is at 3.7%, one-tenth of a percent from the lowest level in over 50 years.
• We have seen 107 consecutive months of job growth, the longest streak ever.
• Wages have risen 3.2% this year, the strongest year in over a decade.
• Inflation has run below the Fed's intended longer-term 2% target for most of this 10-year expansion and core inflation has averaged 2.1% so far this year.
• Consumer spending came in much higher than expected with a 4.7% annualized growth number, the highest gain in 4 years.
Remember that at this stage of elections the mudslinging between candidates can get elevated. All this is an effort to energize their political base but can have unintended consequences. Focusing too much on these accusations on either side can make you feel like there is no hope if “your candidate/party” does not get elected. These messages get amplified as news articles stoke fears and uncertainty in an effort to increase web clicks and sells newspapers. To keep your head as an investor at times like these can be difficult but tuning these stories out or at least muffling their message can be helpful.
Where Do We Go From Here
Right now it is easy to see reasons for a recession. For example, a continuing trade war, your candidate won’t get elected, or a slowing economy. If this is the way you feel, expect the mudslinging and fear based news stories to continue as the elections heat up. In an attempt to motivate their base, politicians will point out everything wrong with the status quo or their opponent, asking you to vote for them in order to correct these problems. This process has the unintended consequence of creating concern, uncertainty, and fear about the world we live in. It is important to keep calm through this process as little has changed from the start of these campaigns to now.
There is always uncertainty out there, right now you have the elections, trade talks, and the direction of the economy. Maybe you are thinking of timing the market by getting more conservative or waiting for an opportunity when times are more certain to invest. But in my experience the market does not wait for an all clear sign. It moves ahead in times of uncertainty or as they say climbs a wall of worry. Usually after this climb up, those investors waiting for certainty only find themselves with more uncertainly as they ponder why should they get in now after the market has already moved up. Perceived certainty usual comes when stock markets peak and these uncertain investors pile into stocks as sentiment becomes euphoric. Because market peaks are impossible to identify, investors pile in to stock only to watch their investments go lower in the coming months or years.
Many have been asking, “When is the recession coming?” With so many asking that question it gives me peace of mind because recessions don’t come when everyone is expecting them. Rather than trying to figure out when the next recession is coming it is better to review your financial plan. Investing is a long term process, involving uncertainly which is why a strategy and financial plan are necessary. The financial plan helps guide what to do in times of uncertainly. It helps with questions such as: should I invest now? What should I buy now? What is the proper allocation? Using a financial plan, rather than your gut, can help keep you on track vs. succumbing to emotion.
If you want to read more about market timing drop me a line and I’ll send you the article, “Timing Isn’t Everything.” It discusses the success rate of professional investors of trying to time the market. Spoiler, their success rate is not very good, which is why we don’t try to do this. Enjoy the article and feel free to reach out if you have questions about anything you read here today.
Have a great start to your fall.
David Barson
David Barson, MBA, CFP® is a financial planner and founder of Barson Financial Planning, a Fee-Only Registered Investment Advisor based in San Mateo, California. Barson Financial Planning offers comprehensive financial planning and investment management services specializing in working with individuals and families, those approaching retirement and professionals in biotechnology.
*Market Data Provided by Financial Media Exchange and Dimensional Fund Advisors
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