SageVest Wealth Management’s latest quarterly commentary is now available. Highlights include:
– The third quarter was volatile with new highs reached, extreme sell offs and recoveries.
– 30-year Treasury yields hit record lows, pushing bond prices higher.
– An impeachment inquiry against President Trump has begun.
A Volatile and Dizzying Quarter
By September 30th, the S&P 500 presented its best performance for the first three quarters of the year since 1997. The longest bull market in history remained in tact. However, overall gains in the third quarter were modest at best, and came with extreme volatility.
The S&P 500 index reached an all time high on July 26th thanks to anticipation of a rate cut by the Federal Reserve Board (Fed), which materialized a few days later. However, the joy of July soon fizzled in August as economic growth concerns emerged and trade tensions continued. Assets flocked to US Treasuries, pushing the 30 Year Treasury to post its lowest yield in history.
As we moved into September, anticipation and confirmation of a second Fed rate cut sparked the markets yet again, bringing the S&P 500 within close reach of its July highs. Oil prices also spiked with Brent crude oil experiencing its largest percentage jump in history after an attack on Saudi Arabia’s oil infrastructure. It was a dizzying three months.
The quarter ended on a positive note, despite headlines of an impeachment inquiry for President Trump just days before the quarter’s end.
The Global Trade War
We concluded the second quarter hoping that the accord between President Trump and President Xi of China to stop imposing new tariffs would hold. Unfortunately, it didn’t. Trade tension threats and actions pursued into the third quarter, reigniting concerns that spooked the markets in August.
The two leaders are scheduled to meet in October, but we don’t have high aspirations, largely due to the recent news about an impeachment inquiry. We would love to be wrong and reach an end to this trade war and now possibly a currency war. However, impeachment discussions undermine President Trump’s position. As we stated last quarter, we think investors need to be prepared for a protracted, and perhaps volatile, path forward when it comes to trade matters.
A Slowing Global Growth Engine
Beyond political headlines, global tariffs and trade tensions are placing pressure on the economy and the markets. Tariffs are driving up the costs of manufactured goods, which translate into one of two effects, or a combination thereof. The manufacturer can elect to absorb higher costs, which cut into profit margins, thereby shrinking company growth and infringing upon company valuations. Or, the manufacturer can charge the customer higher prices, which create a competitive disadvantage, and potentially lead to inflation. Neither scenario is good. The result is that the global growth engine is slowing down with companies, consumers and the stock markets alike feeling the impacts.
Yet, A Growing US Economy
While global growth appears to be contracting, including signs of contraction here domestically, it’s important to recognize that our US economy is nonetheless still expanding. GDP growth is projected to remain above two percent this year. Furthermore, the September job’s report certainly reflects a growing economy as the unemployment rate sunk to 3.5%, the lowest it’s been since 1969. This continued, albeit more tepid growth, keeps us guardedly optimistic as we look forward.
The Fed’s Dilemma
Signs of an economic slowdown coupled with one of the strongest job markets in history are creating a paradox for the Fed. The good news is that inflation remains in check, right around the Fed’s target rate of two percent, helping to keep the economy on a healthy balance. The Fed needs to keep a watchful eye on inflationary pressures that could emerge from a few sources. These namely include wage pressure from a hot job market, tariffs translating into higher prices, or the recent spike in oil and commodity prices. However, the tea leaves currently suggest cool inflation pressure ahead as evidenced by actual inflation figures and the bond market alike.
Rather, the Fed and other Central Banks, namely the European Central Bank (ECB) seem more worried about reinvigorating the economy with monetary stimulus, yet again. The Fed has now cut is lending rate twice, each time by a quarter point. Further rate cuts could easily continue later this year or into 2020. The ECB also cut its lending rates, coupled with a sweeping bond purchase program to help reinvigorate the economy.
The markets have certainly celebrated Central Bank interventions giving rise to greater economic and investment opportunity ahead.
The Bad News Equals Good News Cycle
We’ve been in an interesting bad news equals good news cycle for a while now. The bad news is that the global economy is slowing. These headwinds and headlines have led to bouts of stock market battering over recent months. A slowing economy is never good for companies or consumers. As such, we’ve seen pretty precipitous declines in stocks at varying times over the past year as the markets have reacted negatively to growth concerns.
From this bad news has emerged good news from Central Banks as the Fed and others Central Banks have been stepping in to the rescue. It’s almost ironic that when the economic news gets bad enough it initially drives down the market, but then leads to dramatic upswings because it causes anticipation of Central Bank stimulus actions. Hence the bad news has equaled good news for the past several months running.
We certainly hope that this cycle doesn’t continue to persist, meaning that we hope to reverse course from the bad news headlines. That said, recent news emerging since the beginning of the fourth quarter does show continued impacts of economic decline, hence dramatic selloffs on the first two days of the quarter. Only time will tell if the recent bad news will yet again lead to good news, with the ideal eventual result of a true economic rebound.
We believe it’s important to comment on the recent launch into an impeachment inquiry. This is disconcerting on many levels. It is certainly headline newsworthy and will remain so for the foreseeable future. However, we think it’s important to note that the markets have been largely unresponsive to impeachment news as of yet. The market downturn that recently ensued was related to economic headlines, not political ones. That’s not to say that an impact couldn’t emerge, but it does suggest that we could avert political market volatility unless proceedings make a swift advancement.
As we move toward the end of the year, we certainly hope that the incredible gains of 2019 thus far can hold, ideally offering greater advancement ahead. We also recognize that the economy and the markets face significant growth headwinds. We have been advising clients and readers for sometime to ensure that you’re comfortable with your investment positioning to enjoy the potential upside while also protecting yourself against the potential downside. Market gyrations over the past twelve months are something to be mindful of as you plan for the near-term and the long-term.
As always, we welcome you to contact us to discuss your investment positioning in greater detail.