THIRD QUARTER RETURNS. During the third quarter, the U.S. stock market posted a modest gain of 1.16 percent. The rebound was not based on actual economic trends as GDP slowed in the second quarter to 2.2 percent, substantially down from 3.1 in the first quarter.
International Developed and Emerging Markets fell, down -0.93 and -4.25 percent respectively. The U.S. Bond market index was up +2.27 percent for the period. A globally diversified portfolio of 50/50 equities and fixed income was just marginally positive +0.33 percent for the period and +9.18 percent year to date.
In U.S. dollar terms, countries different than last quarter (Belgium, Japan and Netherlands) garnered the highest country performance in developed markets, all up over 2 percent. In emerging markets, Turkey and Taiwan recorded the highest country performance, up 11.1 and 4.99 percent respectively. Pakistan was the worst performer, down over 21 percent. The U.S. was middle of the pack, returning 3.89 for the quarter.
FIXED INCOME. In response to various risks to economic growth, the Federal Reserve cut rates another 25 basis points (0.25 percent) which helped propel positive returns for Fixed Income holdings during the third quarter. Short-term corporate bonds gained 1.17 percent; intermediate-term corporate bonds 1.74 percent; and municipal bonds 1.58 percent during the quarter. Corporations such as Coca-Cola and Apple were among the 130 issuers who took advantage of falling interest rates to hit the market with over $158 Billion in new corporate debt in just the month of September.
ALTERNATIVE INVESTMENTS. Federal Reserve rate cuts positively spurred returns in the REIT sector earning it the top performing asset class status for the period. The U.S. REIT Index finished the quarter up +6.83 percent. The Bloomberg Commodity Index declined -1.84 percent in the third quarter of 2019. Metal-based commodities were the few positive performers with Nickel far outpacing the rest up +34.7 percent for the quarter. Wheat was the worst performer down -13.6 percent followed by Coffee and Corn, both down -10.7 percent.
YEAR TO DATE. In the short term, economic trends and stock market returns do not always move in tandem. This was the case both in 2018, and also year to date in 2019. In 2018, despite the US GDP showing strong and accelerating growth, consider this: the broad U.S. Stock Market declined -5.14 percent; International Developed stocks dropped even further, down -14.1 percent; and a globally diversified 50/50 portfolio of stocks/bonds also had a negative return, down -3.49 percent.
The exact opposite has happened so far in 2019. GDP, Manufacturing data and earnings per share have been on a steady decline throughout the year, yet the broad global stock market is up +16.1 percent; while a globally diversified 50/50 portfolio of stocks/bonds has returned +9.18 percent.
Over longer periods of time, economic earnings and market returns do align; however, over shorter spurts, they don’t always make sense. (See attached article “Timing Isn’t Everything.”) I believe a recent comment from an investing group I respect sums it up well:
“I used to think the market wasn’t yet aware of my views. Then I got frustrated when the market disagreed with my positions. Then I realized the market didn’t care about my view at all.”
SUMMARY. Volatility has resurfaced – and the news cycle would have you believe it is because of trade tensions, heated political fighting and confusion over whether the Federal Reserve will continue to ease rates. The real reason is slowing economic data combined with declining earnings for almost a year now with anticipated negative third quarter earnings results. Because of this, U.S. stocks continue to make limited headway. In fact, the S&P500 is a mere 2 percent above the initial peak reached January 26, 2018, over twenty months ago.
I like to remind clients that things are never as bad or as good as the media would have you believe. In spite of all the negativity in the news today, U.S.-centric middle market companies are performing well and unemployment remains at record low levels. There is still a lot to be positive about. For us, in times like this, staying grounded always comes back to revisiting your personal retirement, investment and charitable plan:
Does my portfolio risk align with my financial plan?
Am I taking more/less investment risk than I need to?
If I am retired, how is my cash/short term bond living expense “runway” – if the market sells off?
Do I have too much money in my employer’s stock?
If certain market events happen will it impact my ability to do things I want to?
These are all good and important questions.
We are always here to revisit and validate where you are at and the plan that is in place. The best time to make any changes is when things are going well, when thinking is clear, and when emotions are steady – not in the middle of a storm.
We greatly appreciate the opportunity to work with each of you. We recognize that each client’s situation is unique and incorporates different factors into their investment and financial plan.
As always, if you have any questions or concerns about current market trends and the impact on your personal situation and plan, please contact us and we would be happy to discuss.
Please follow this link to read the complete Quarterly Market Review | 3Q 2019.