Q3 2019 Market Review
Updated: Jan 17
With so many conflicting signals about the global economy, uncertainty continued to be the theme as we entered the 4th quarter of the year. Stocks were relatively calm in September after a volatile August, and ended slightly higher for the quarter, with the Dow and the S&P 500 each gaining 1.2%, and the technology-heavy Nasdaq, which is more sensitive to the global economic slowdown, down 0.1%.
However, much still remains the same as the broad market has made little headway over the last eighteen months with averages remaining only slightly higher than the highs reached at the end of January of 2018. Despite falling Treasury yields, bonds continue to rise as demand from investors looking for income has driven prices higher and higher, resulting in a solid quarter for bonds with the Bloomberg Barclays U.S. Aggregate Bond Index gaining 2.3%.
As has been the case for over a year, the market is still highly reactionary to the headlines and there is no shortage of breaking news stories with the ongoing trade tensions between the U.S. and China, political uncertainty, and the late stages of the longest economic expansion in U.S. history. Since last quarter, there have been continued signals of slowing global economies leaving much speculation as to the timing of the next recession. Yes, we have seen declines in manufacturing and corporations continue to signal caution as they plan ahead, but positive indicators exist as well. The labor markets are strong and consumers are continuing to spend. The markets have continued to have a good year and are hovering close to all-time highs. We are also off to a solid start to earnings season with the majority of earnings reports coming in better than expected. While consensus earnings estimates were pessimistic after two straight quarters of negative earnings growth, the news has been good so far.
Much of the financial news during the quarter surrounded the Federal Reserve's easing of monetary policy with two rate cuts, as well as the inversion of the yield curve as a recession indicator (when short term interest rates are higher than long term rates). While the curve has been inverted for several of the past months and has recently started to regain the more traditional upwardly sloping shape, many feel that the inversion is more of a technical phenomenon due to historically low-interest rates in the U.S. and negative rates abroad. Recent cuts have stimulated borrowing but investors need to have cautious expectations that the Fed alone can stimulate growth in the economy. The market appears to be pricing in yet another cut later this month, and whether or not interest rate cuts will be enough to boost the economy remains to be seen.
During the last quarter, we began seeing a rotation from momentum growth stocks which have dominated market growth since the financial crisis, to more value stocks as cautious investors began to seek more stable earnings, attractive valuations, and equity in companies perceived to be better positioned for a slowing economy. The rotation may not continue, but during the late stages of the economic cycle investors often favor companies that provide products and services perceived to be less sensitive to a slowing economy. Regardless of value or growth, portfolios should be invested in quality businesses and securities that are attractively valued and positioned for the longer-term. This is as important in selection of any asset class including fixed income.
As we head into the holiday season, it is important to remember to focus on fundamentals rather than the news or tweet of the day. While there are many concerns, the economy is stronger than investors’ current perceptions, and our job at Aevitas is to separate these perceptions from actual economic and business fundamentals. We are firmly in the late stages of the business cycle and while we remain cautious with continued uncertainties, it is important to remember that timing the markets has never proven to be an effective strategy. No matter what the headlines are, we invest our clients according to long-term goals, needs, and risk tolerances. We have continued to adjust client portfolios throughout the year as a result of being overweight in asset classes that have done particularly well over the business cycle. In many cases, we have increased cash holdings and added alternative investments as appropriate and necessary.
Please continue to communicate with us any concerns you may have, including any potential short-term needs of cash from your portfolios. Finally, we hope you received our invitation to our annual holiday open house on Thursday, November 21st and look forward to seeing many of our valued clients.