A variety of economic and political themes led to mixed stock market returns in the third quarter while bonds fared well. The most significant global issue continues to be the Trade War between the US and China which is estimated to detract over $700 Billion from the global economy in 2019. A direct result of the Trade War, combined with a still-evolving Brexit, has led to significantly slower growth in Europe including a large volume of negative interest rate bonds (meaning the investor is actually paying extra for the opportunity to buy a bond instead of receiving interest payments).
Slowing global growth has also led to increased concerns about a recession in the US which has been exacerbated by political disruption with a potential Presidential impeachment process, ongoing turmoil in the Middle East, and lack of progress on a variety of political initiatives. Despite all these issues, US Large Caps had a positive quarter while US Small Caps had slightly negative returns along with International and Emerging Markets. All markets are in positive territory for the first nine months of 2019 and have successfully erased the losses from late 2018.
There are a few key investment themes that we will be monitoring over the next few months. The Trade War between the US and China continues to be the most notable headline to watch because if the current tariffs stay in place (or increase) over the next few months that will create a difficult environment for growth. A wide variety of industries have been affected by the trade issues and the next set of tariffs would impact additional companies and consumers. Consumer spending continues to be one of the most important metrics to track as it drives over two-thirds of the US economy, so a more cautious or reluctant consumer has a significant effect.
The Federal Reserve has been proactively reducing interest rates in an effort to support consumer spending and maintain positive growth in the US, with at least one more rate cut expected before year-end with guidance for more in 2020. At this point, valuations look appealing for Value and Small Cap stocks, both of which have significant upside opportunities as the market continues to move forward. We also see appealing investment opportunities in International stocks with the caveat that a strong US Dollar continues to be a headwind for those markets.
The next few months should be very interesting as all of these economic and political themes continue to build momentum, which could lead to more market volatility and additional reasons to keep a fully diversified investment portfolio with a patient approach to incorporate long-term investment strategies. Best wishes for a smooth transition into Fall with hopes for a positive global environment!
For more information on investments and the markets this quarter you can look at our Quarterly Market Review.
As always, we are here to listen to our clients and share our perspectives. We hope that our newsletter and articles provide you with inspiration and useful information. We encourage you to share our resources with family and friends who you think would benefit from them. Happy Fall!