“Fancy a cuppa’?” “Anyone for tea?” Even though our beloved Chicago Bears were “bloody” unsuccessful in their visit to London this past weekend, I’m “chuffed to bits” to put a little “cheeky” British spin on this quarter’s market commentary… Let’s “smash it”!
After a volatile three months, the third quarter of 2019 is officially in the history books. The S&P500 finished only 1.6% below its all-time high, bonds rallied as yields lowered, and alternatives such as commodities and real estate rallied. It’s been a rather “blimey” year for investor returns so far, but there’s a lot of uncertainty out there about if these “mint” times can last. Let’s look at how the asset classes fared first before turning to what’s next.
Equities: Equities were about unchanged for the quarter, as evidenced by the MSCI AC World Index -0.2% reading for the quarter. Domestic large cap stocks represented by the S&P500 did the best relatively, up 1.7%, but underperformed in the final weeks of the quarter. Recent trends show that traders are gravitating toward stocks with cheaper valuations instead of pricey, growth ones. International equities* underperformed for the quarter, down -1.8% but had a strong showing in September. Even with this so-so quarter, stocks, in general, are up over 15%** Year-to-Date (“YTD”)! Yes, “mate”, this bull market – the longest on record – continues, but at times looking “quite knackered”.
Fixed Income: The Barclays US Aggregate Bond Index & the Barclays Global Aggregate Bond Index ascended even higher, up 0.7% and 2.3%, respectively for the quarter and now up 6.3 & 8.5%, respectively YTD. “Brilliant!” Yields continue to fall which pushes bond prices up. But how far can they fall? The 10-year US Treasury finished the quarter at 1.68%, a full percentage point below where it started the year. For yield seekers, at least it’s still positive here in the States as the amount of negatively yielding debt around the world swells. Sixteen global central banks lowered rates during the quarter including the US Fed, all of them hoping to prop up their economies. As long as they’re successful, all is good. But what if our slowing US economy actually stalls? We could be “bloody snookered”…
Alternatives: The Credit Suisse Liquid Alternative Beta Index, our chosen proxy for alternatives, showed a +0.3% gain and now up 6.1% YTD. Lots of winners in this space. “Lovely!” For example, there is a lot of money flowing into gold***, +4.4% on 3q19 & +14.7% YTD, as it is seen as a safe haven. And real estate, +6.3% 3Q19 and +23.5% YTD, has rallied from investors looking for yields that are more than the bonds like those mentioned above.
Frankly, it’s been a pretty great year for the balanced investor who’s now looking at YTD returns that around double-digits. But it’s not all “hunky-dory”. The main worries are the following:
- The US-China trade war continues affecting the global economy. Sure, since the US exports less than every other major country, this shouldn’t affect us as much. But given the uncertainty, many companies are choosing to hold off on capital expenditure until we get clarity on this issue. Reports earlier this week that US manufacturing momentum has seriously slowed down led to one of the worst fourth quarter starts for the stock market in years. Politics will continue to make it volatile.
- The Fed’s path of monetary easing. It’s gotten “mad” – it seems every time there is bad news, it’s good news for the stock market because traders are betting on the central banks around the world to support the markets. Seems “dodgy”, right?!? So the Fed must play this balancing act, always wanting to keep the economy humming along. Quite frankly, there really is no economic reason for a rate cut right now if it weren’t for the trade conflict. Figure we’ll have at least one more cut, possibly two, in 4Q19 and hopefully that’s it. Otherwise, if they keep lowering, it means we have fallen into a recession.
It’s in a lot of peoples’ interest to get a trade deal done. If it does, markets will celebrate it. The longer a deal plays out, the more volatility we’ll see and the higher the risk of recession becomes. The US economy is not “going down the loo”, but it won’t continue to go bonkers with everything mentioned above as well as the Tax Reform stimulus fading away in the rear-view mirror as quickly as a Guinness at the Ye Olde Cheshire.
This all isn’t “rubbish”. Actually, there is a lot of turmoil out there. So don’t be a “sorry bloke”. In challenging times like this, you want to make sure you’re working with an experienced wealth manager like DWM to guide you through.
Don’t hesitate to contact us with any “lovely” questions or “brilliant” comments, and Go Bears!
Brett M. Detterbeck, CFA, CFP®
DETTERBECK WEALTH MANAGEMENT
*represented by the MSCI AC World Index Ex-USA
** represented by the MSCI AC World Index
***represented by the iShares Gold Trust
****represented by the iShares Global REIT ETF