The third quarter seemingly packed a year’s worth of market action into three fast moving months. Regardless of your stock market, interest rate or economic viewpoint, there was something for everyone in this fluid and volatile quarter. It began in bullish fashion as most of the major stock benchmarks jumped to all-time highs in the first weeks of July. Later, as July turned into August, the S&P 500 Index fell almost 200 points from its all-time high in a matter of days, giving all investors a somber reality check. But despite this temporary free falling, the stock market climbed back from the August lows back to within reach of new all-time highs by the end of September and managed to produce modest gains for the quarter, adding to the impressive returns for the first half of 2019.
Small cap and international stocks again lagged the S&P 500 during the quarter, posting small losses, and ultimately advancing by double digits year-to-date through the end of September.
Utilities were the best performing sector last quarter, helped by lower interest rates. Energy stocks were the worst performer, although they did rebound in September amid turmoil in the Middle East that briefly sent oil prices higher. All the sectors of our domestic economy have recorded positive year-to-date returns.
The third quarter of 2019 was a remarkable one in the fixed income market. It began with low interest rates, making any thoughts of rates moving significantly lower seemed improbable. There were numerous headlines about a yield curve inversion, as the 10-Year Treasury briefly traded at a lower yield than the 2-Year Treasury for the first time since 2007. Fear of an inverted yield curve signaling the next recession motivated investors to sell stocks and buy bonds and the rapid move to lower yields caught most investors by surprise. The 10-Year Treasury yield dropped to 1.68% by the end of the quarter and the Barclays Aggregate Bond Index gained 2.3%.
The third quarter brought a number of attention-getting events. Trade negotiations between the U.S. and China broke down, but as the quarter ended, it looked like they would resume in the fall. Manufacturing was giving mixed signals both here and abroad, breeding concerns about the health of the global economy, but the job market was robust with a near-record number of job openings and unemployment rate at a 50-year low. Retail sales looked healthy, and consumer spending which comprises almost 79% of the economy remained strong. Our domestic economy grew by 2% during the second quarter, compared to an increase of 3.1% in the previous quarter, sparking a renewed debate about the strength and the remaining duration of this outstanding economic expansion that started ten years ago.
The Federal Reserve took steps to ease monetary policy, lowering the Fed Funds rate in July. The ¼ percent decrease to a range of 2.00-2.25% was not enough to satisfy investors who wanted a larger cut. The Federal Open Market Committee then voted again in September to lower rates for the second time by another ¼ point. Federal Reserve Chairman Jerome Powell, speaking to the media after the decision, called the outlook for the U.S. economy “favorable.” At the same time, he noted “a lot of uncertainty” surrounding the near-term economy.
This uncertainty will most likely sound louder as we enter the last quarter of the year. Trade disputes, geopolitical frictions and Washington gridlock remain key drivers of the economy and markets. As we look ahead to the closing months of 2019, most of the year’s sources of volatility remain in place and there is plenty in the calendar to keep markets anything but quiet. Slower global growth will intensify pressure on the profit outlook for large multinational companies. Central bank policies may – or may not – reignite growth but will definitely keep interest rates low. We expect the U.S. economy to avoid a recession but to be increasingly uneven. In this environment, month by month, the data could easily temporarily surprise to the downside, causing alarm bells to sound and feeding back into higher volatility. With that in mind, we believe now is not the time to deviate from your long-term strategic asset allocation that combines long-term growth positions with holdings in high-quality companies that have sustainable business models and a history of paying dividends.
Dumont & Blake Investment Advisors, LLC
September 30, 2019