Fall is here, football is back, and we now move to the final quarter of 2019. Much like the game of football, the fourth quarter is when losing and winning will be determined. To date the market is leading, but will it blow the lead like the Cleveland Browns of the past? Sometimes there is a “Santa Claus” rally and sometimes the Steel Curtain pushes you back behind the line of scrimmage. Historically, the fourth quarter is a goodtime for the market. Over the last 31 years we have had 6 negative and 25 positive fourth quarters in the S&P 500, which is an 80% positive rate.
We enter the fourth quarter with a mixed economic picture, as manufacturing is weakening while the consumer and services remain strong. Trade tensions are still a roadblock as the new NAFTA, the United States-Mexico-Canada Agreement (USMCA) awaits Congressional approval. The US/China tariff dispute may not see an end until sometime in 2020. Corporations have retreated in their capital spending as they wait for a conclusion in the trade war. More individuals have been fearing a recession as Google reports the search volume for “recession” hit highs last seen in 2009. Consumer confidence is still strong, but we continue to watch for signs of weakening. With the consumer being such a large part of the economy, any weakness could push us closer to a recession. On a positive note, interest rates remain low and could go lower, inflation is low, and the Fed has become accommodative. All good signs for the markets. Many economists are viewing our economy as an airplane. Currently we are flying on one engine, the consumer. Our economic speed would be described as stall speed, which is the slowest a plane can fly while still maintaining a level flight.
US equities outperformed both the international and emerging stock markets. Large companies fared markedly better than smaller companies in the US and international markets. Slowing international and emerging economies continue to weigh on their performance. REIT performed well as they tend to move up as interest rates move down. We believe large US companies will continue to look attractive as compared to their international, emerging and smaller counterparts.
Interest rates in the US Treasury markets decreased during the third quarter. As noted in the yield curve chart, rates fell at all maturities versus the second quarter. As low as our rates appear in the US, they are still higher than most sovereign debt. As shown in the sovereign debt chart, many countries have negative yields, in fact the rate of negative yielding debt expanded from the start of the year. While we do not believe the US will have negative yields, there are certainly arguments that rates in the US could go lower. We should see a reduction of a quarter point in the Fed Funds Rate later this month.
Stall speed seems to be the scenario moving forward. Growth appears to be weak to flat with the consumer continuing to move the economy forward. Pending elections could see fiscal and monetary stimulus. Consumer sentiment will be on the mind of the market as trade issues, higher energy prices, and slowing international markets could turn off the consumer. Trade deals would be a positive for the market, as that could help international markets and possibly bump start manufacturing. Bond rates should remain low and inflation should be in check. We look forward to speaking with you over the next couple of weeks. We have had many great client conversations about markets and the economy, some of which triggered adjustments in portfolios. Our advisors are always available to discuss your goals for today and the future.
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