Third Quarter Market Review

Third Quarter Market Review

John Fischer, CFA®, CFP® | Chief Investment Officer

October 16, 2019

Tricks or Treats? How the Market May Look in the Last Quarter of 2019

By all accounts, 2019 has been a banner year for investors so far, with every major asset class experiencing positive returns through the first 9 months of the year. But as we enter the last quarter when the weather starts to cool, investors seem increasingly worried about markets doing the same.

With Halloween approaching, it seems natural to ask: does the market have more tricks than treats in store for us? Or will the 10-year market rally hold out for a little longer?

The Many Reasons to Expect Market Tricks

Investor anxiety, as measured by the VIX index, has risen over the past 2 months. The metric is now at a level not seen since its last peak in January 2019, as existing market concerns have become even scarier and new market concerns have appeared.

The biggest market ghoul that just won’t fadeaway is the trade dispute with China. The war of words and tariffs has stretched on for almost two years now, and what was initially considered a bump in the economic road has turned into a much bigger obstacle.

Given the lack of meaningful progress on the key issues in the dispute to this point, investors should expect news headlines to spur ongoing market volatility. While still possible, a comprehensive resolution prior to year-end is increasingly unlikely.

This isn’t the only issue spooking investors. Manufacturing numbers have shown particular weakness, dipping to their lowest levels since 2009. Both consumer and business confidence figures have fallen in recent months from their recent highs. And then there’s the issue of the inverted yield curve, which happens when short-term government yields are higher than the 10 year government yield.

These numbers can all give investors quite a fright about future economic growth, but this isn’t reason to get scared out of your set.

While an inverted yield curve has often signaled a recession in the past, we should keep in mind that it isn’t a perfectly accurate measure of market movements. The time between inversion and recession has varied considerably, as well. We would caution investors from using any one data point for their investment decisions as nothing works all the time.

Another reason for a general sense of unease for many investors are the geopolitical challenges that continue to lurk in the shadows. The vote by the UK to leave the European Union (AKA, Brexit) occurred more than 3 years ago, but its final resolution is still uncertain. This not only drags down economic growth in European economies, but trading partners for the EU, too. In other areas of the world, the U.S.’s tenuous relations with Iran and North Korea have the potential to supercharge investor fear as well.

But There Are Still Opportunities for Treats Instead

Despite all these ghastly, ghoulish concerns about the market, it would be short-sighted to predict the death of the bull market too soon. That’s thanks to one very important factor: the U.S. consumer.

The U.S. consumer makes up about 70% of our GDP. When you look at the health and wealth of the U.S. economy, consumer spending is critical to consider — and that’s currently looking strong.

The unemployment rate is 3.5%, its lowest level in 50 years. Most consumers who want jobs, have jobs. Better yet, consumer wage growth is rising at a rate above 3% for the year.

Some other market treats for investors include low interest rates and low inflation. Low interest rates incentivize consumers to borrow and purchase goods such as homes and cars, while low inflation means consumers can purchase more goods with the money in their pockets. They have done exactly that as personal spending has risen by an average of 3% per year since 2017.

Low inflation has also allowed the Fed to continue to support the economy with its accommodative monetary policy. The Fed has cut its short-term interest rate twice this year to help support the economy in the face of market uncertainty stemming from the China trade dispute.

Put this all together and the U.S. economy is expected to grow at 2.2% for 2019.¹ While that’s modest, it’s also consistent with the rate we’ve seen throughout this 10-year market rally. Furthermore, its strong evidence that a recession may not be as imminent as some prognosticators suggest.

Trick or Treat? What the Last Quarter of 2019 Might Have in Store

It should come as no surprise to investors that after 10 years of an economic expansion, the number of tricks, or negative economic indicators, are beginning to rival the treats, or positive indicators, we’ve all gotten used to seeing for the last decade. The risks of future market downside offsetting the potential for further upside is a normal part of investing in the later stages of the economic cycle.

Every market cycle in history has ended in a recession so we know that, eventually, we’ll have to deal with some tricks coming our way. But no one really knows when that will happen and the U.S. consumer is doing everything possible to push that time further down the road.

In the meantime, investors would do well to avoid the guessing game of when the economic music will stop. Instead, focus on the aspects of your financial plan that fall within your control.

After 10 years of market prosperity, investors should review their allocation to stocks and bonds to ensure their risk exposure aligns with their financial plan and comfort with risk. Make sure your portfolio is appropriately diversified, and review your personal savings and spending rates.

Focusing on the aspects of your financial plan you can control is the best way to make your financial goals become treats, not tricks.

Source: ¹ https://www.federalreserve.gov/monetarypolicy/fomcprojtabl20190918.htm

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