3Q19 Market Overview
Global markets digested mixed economic news during the quarter. Fortunately, consumer consumption remained strong to help offset trade concerns and protect impressive year-to-date gains.
As the next round of U.S.-China trade policy negotiations kick-off, volatility will continue to ebb and flow as each side attempts to gain leverage. The longer the trade war drags out, the more damage could be done to the manufacturing sector as well as business confidence and investment. On a more positive note, company profits are still solid and are expected to increase by over 10% next year.
Regardless of the market direction as we close out the year, our rebalancing process will take advantage of the market movements to shift towards our target allocations in the most tax-efficient manner possible while maintaining your desired risk level.
U.S. equity markets
U.S. equity markets posted modest gains with the Russell 3000 returning 1.2% during the quarter and adding to the exceptional 20.1% year-to-date gain. The ongoing U.S.-China trade tensions continued to weigh on U.S. markets. The collateral damage of the trade disputes seems to be falling on corporate confidence and spending. Fortunately, strong personal consumption helped offset manufacturing weakness. To combat the economic softening and better align interest rates with other central banks, the Federal Reserve decided to cut interest rates in July and September. In early October, the U.S. Labor Department reported that employers added 136,000 jobs in September and average hourly earnings slowed from 3.2% to 2.9% over the past year. With the unemployment rate now at a five-decade low of 3.5%, it appears that we are very close to the bottom in this tight labor market. Regardless of President Trump’s unorthodox trade policy approach and increased geo-political tensions, the markets should continue to march in the direction of actual earnings and slowing forecasts.
International Equity Markets
International developed equity markets recovered most of the summer losses in September with a 1.1% quarter loss for the MSCI EAFE and more encouraging 12.8% year-to-date gain. Despite continued pressure over trade and global growth concerns, the Eurozone equity markets gained ground. With slight economic growth and annual inflation at only 1%, the European Central Bank took steps to begin quantitative easing to further accommodate interest rate cuts. Japan advanced trade negotiations with the U.S. and Prime Minister Abe’s political party won by a comfortable margin. These developments benefited Japanese equity prices and helped remove uncertainty about Japan’s future policy and pro-growth agenda. The MSCI emerging markets lost 4.3% as U.S.-China trade pressures escalated in the summer before cooling down a bit in September. As the markets continue to work through the trade talk noise, both developed and undeveloped international markets look even more attractive from a valuation perspective compared to U.S. markets, however, it may take coordinated fiscal stimulus to jump start stagnant international economic growth.
Fixed Income Markets
Safety-minded investors experienced positive results as the closely watched Barclays Aggregate rose 2.3% during the quarter and added to the healthy 8.5% year-to-date gain. As widely expected, the Fed continued its dovish stance to support U.S. economic growth and provide insurance against possible risks by cutting the federal funds rate by another quarter percent in September. Factoring in this accommodative posture, the 10-year Treasury retreated further from 2.00% on June 30 to 1.68% on September 30. Given the yield pressure, longer maturities benefited most. The Barclays US Government Long posted a 7.8% quarter gain, Intermediate 1.2% gain and Short 0.6% gain. In the international fixed-income arena, the JPM Non-US Unhedged gained 0.1%. Strong demand and limited supply helped elevate the Barclays Municipal another 1.6% as investors searched for more favorable after-tax returns.