Q3 2019 Market Perspective
We imagine that you are finding it increasingly difficult, if not impossible, to sift through the daily onslaught of headlines and come to any meaningful conclusions regarding the current state of the global economy and the markets. We too, at times feel like we have more questions than answers. However, the search for answers has led to many productive conversations with our clients and instilled further confidence in our own investment philosophy. The data is important to maintaining the big picture, but we do not react to daily market volatility. The broad U.S. equity market is near its all-time high, economic data has been a mixed bag and our political environment is chaotic at best.
As it relates to all of you, keep asking questions. The dialogue is healthy and your investment strategy should be based solely upon your own individual circumstances, which may change over time. We are here to help you maintain clarity on your overall plan.
We would like to take a moment to restate our investment philosophy: We believe that the most prudent approach to long term investing is adhering to a disciplined strategy. We primarily focus on strategic asset allocation, diversification and risk/reward efficiency. Additional factors such as tax-efficiency, cost controls and opportunistic rebalancing positively influence results. We understand that each investor has personal financial and emotional factors that will drive their behavior. Therefore, each individual strategy can be further customized to address items such as risk tolerance, risk budget, tax status and cash flow, to name a few.
Investors have accepted that market volatility is once again a reality of being invested. New headlines surface daily and it is certainly exhausting (if not sometimes fruitless) attempting to assess what it all means for the markets. Evidence of this, we have witnessed the markets move multiple percentage points in both directions during the course of a day. Later on in this communication, we will provide some perspective on this volatility, yet we reiterate that volatility is normal.
The S&P 500 is roughly 4.5% off of its all-time high reached in July of this year (as of 10/8/19)(1)
The Federal Reserve has cut the target range for the federal funds rate twice in 2019. The Fed is attempting to guide the economy into a soft landing, which is a moderate contraction that avoids a recession
The Fed has indicated it will remain accommodative to the economy. Expectations are for an additional rate cut this year and the Fed has stated it will continue its purchase of Treasury bonds
Global and U.S. manufacturing data is showing signs of weakness. However, this weakness has yet to trickle down the services sector, which is important to maintaining positive GDP growth
The unemployment rate in September was 3.5%, the lowest in 50 years. The labor force is growing and wages are stable(2)
GDP growth is slow and steady and near term Recession fears have somewhat subsided
The Treasury yield curve inverted for a short period of time during the quarter, however, it has widened over the past few weeks
Repo market – The Fed announced it would continue to provide liquidity to U.S. funding markets amid a brief spike in the overnight lending market. The issue appears to have subsided, but should be watched closely
Trade war with China will affect all of this. Tariffs have a negative effect on the prices consumers pay for certain goods, exports and the confidence of both businesses and consumers
Third quarter corporate earnings season is set to begin. Commentary on capital spending and investments by management will be closely monitored. We do not expect companies to commit to spending in light of uncertainty surrounding a trade deal
Politics – impeachment, the election and the unknown will be a key driver of market volatility for the foreseeable future
While we are hopeful a trade deal is eventually reached, nothing seems likely in the near-term
EXAMPLES OF INTRADAY MARKET VOLATILITY
The two charts below provide examples of the daily market volatility we have experienced recently and should expect to continue into the foreseeable future. Both of these graphs reflect the price movement of the S&P 500 index during only one trading day.
Example 1. On October 3rd at 10AM the ISM Non-Manufacturing PMI report was released. The market reacted to the underwhelming results by selling off 1.2% in less than 10 minutes (see chart of S&P 500 Index below). After the information was digested and investors saw this as evidence the Fed would remain accommodative, the market rallied nearly 2% from the lows of the day.
Example 2. On October 8th the market opened for the day under pressure after the White House announced that it had added many Chinese companies to an export blacklist. Just before Noon the market started to rally on the heels of positive comments from Fed Chair Jerome Powell who was speaking at a conference. The S&P 500 index had recovered nearly 1% intra-day before negative trade headlines surfaced. The market proceeded to sell off more than 1% in the last hour of trading.(3)
We do not react to daily market movements, yet we are mindful of the impact that headlines will have on intraday volatility.
Federal Reserve Chairman Jerome Powell spoke recently at the National Association for Business Economics. In short, when speaking about the current U.S. economic expansion he stated, “This feels very sustainable.” While he continued to discuss the upside and downside risks that face the economy, the tone was generally positive.4 This epitomizes the situation we find ourselves.
News headlines drive the markets on a daily basis, as illustrated in the examples above. While we do not react to daily market activity, we monitor the impact it all has on the big picture. The U.S. remains in a steady slow growth environment and the current economic expansion continues. The Fed is poised to keep things going while numerous shocks to the economy exist.
We must continue to have open dialogue and review your individualized plans as appropriate. Meanwhile, we must hold true to our investment philosophy and focus on the areas we have control over.
Chart A) 2019 Year to Date Total Return of Major Asset Class Indexes
Source: Bloomberg; 2019 year to date total return, International, emerging market, S&P 500, Barclays Agg indexes
1 - Source: Bloomberg: S&P 500 Index; Emerging Markets Stock Index = MSCI Emerging Markets Net Total Return Index; International Markets Stock Index = MSCI EAFE Total Return Index. Bloomberg Barclays Aggregate Bond Index
2 – Unemployment. Trading Economics US Unemployment Rate.
3 – Bloomberg; S&P 500 Intraday Charts
4 – Jerome Powell speech at NABE: Reuters article
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