Market Commentary

The third quarter began with a robust jobs report and a 25 basis point rate cut by the Federal Reserve (Fed). These positive tailwinds did not last, as the bond market began signaling trouble in August. The yield curve briefly inverted when the 10 year Treasury dipped below the 2 year rate causing stocks to plunge. September brought more easing by central banks around the globe, including another 25 basis point rate cut by the Fed. Throughout the quarter, slowing growth and political concerns were behind much of the whipsawing. Even so, U.S. large caps were able to close out Q3 up 1.70%, unlike U.S. small caps, developed international, and emerging markets which posted -2.40%, -1.70%, and -4.25%, respectively. Fixed income also took a seat on the roller coaster ride but closed up for the quarter as rates declined. U.S. aggregate bonds were the big winner across the board posting a 2.27% gain followed by high yield bonds, up 1.33%, and global bonds, down 0.11%.

 The U.S. and China are scheduled to resume trade talks early in October. The discord, now a year long, has caused many to lower their 2020 growth forecasts. While China is expected to continue to be one of the fastest growing economies in the world, it would not be surprising to see their growth dip into the 5% range next year. According to the Organization for Economic Cooperation and Development (OECD), “escalating trade conflicts are taking an increasing toll on confidence and investment, adding to policy uncertainty, aggravating risks in financial markets and endangering already weak growth prospects worldwide. The OECD projects that the global economy will grow by 2.9% in 2019 and 3% in 2020 - the weakest annual growth rates since the financial crisis, with downside risks continuing to mount.”

 In the U.S. we see fundamentals that should continue to help support our economy and ease concerns of a near-term recession. Economic activity has been rising at a moderate rate, job gains have been solid, the unemployment rate has remained low, overall core inflation is running below 2%, and household spending has been rising. According to the CME FedWatch Tool, there is an 81.8% probability that the Fed will cut rates by another 25 basis points in October which would help reduce short-term Treasury bills below the 10 year note. The Federal Reserve Bank of Cleveland forecasts GDP growth of 2.1% over the next 12 months and has lowered the likelihood of recession in the U.S. to 37.9% (from 44.1%). 

 We recommend that investors stay focused on their long-term goals and remain well diversified throughout the continued volatility that we are likely to experience as we head closer toward another election year.