Despite plenty of headwinds for the equity markets (lingering trade dispute, new impeachment proceedings, and a crude oil infrastructure attack to highlight a few) the S&P 500 eeked out a 1.9% gain for the month. Small cap stocks fared about as well as large cap names with the Russell 2000 index posting a 2.1% return for September. Foreign stocks fared equally well last month with a 2.9% return for the MSCI EAFE index and a 1.9% return for the emerging market index (see table above).
3rd Quarter 2019:
September also brought us to the end of a volatile 3rd quarter with modest gains for the most part across US equities and modest declines for international stocks. Meanwhile bond returns were also up this quarter due entirely to price appreciation as yields fell throughout the quarter. The yield on the 10 Year Treasury note fell 0.325% this quarter, the biggest quarterly decline in seven years. With rates so low, the bond market volatility has been at multi-year highs until it determines when the economy will be heading for a downturn. We did see a daily yield curve inversion in August (when the 10 year Treasury yield is lower than the 2 year Treasury yield) which is a prognosticator, some say, of a recession on the horizon. The key point is that it’s not a good indicator of determining when on the horizon that will happen.
Through 9 Months:
Year-to-date through September 30th, the market has surprised economic and investment strategists alike with its resiliency. Few thought we would be reporting a 21% gain for the S&P 500 through nine months of the year including dividends, but here we are! We continue to add another month to the record books for the longest bull market in U.S. history. Now in its 127 month, this bull market has provided astounding returns since its nadir in March 2009, with very few dips along the way (see chart above). To put this market run into perspective, the average bull market in the U.S. lasts 54 months (4.5 years) so this bull 10+ year market is extended, but in our opinion, not overvalued.
We think volatility in the markets is here to stay. Today, stocks sit close to July’s all-time market high, despite the macro issues we face seemingly on a daily basis. We attribute the continued resiliency to a few main catalysts such as an accommodative Fed and healthy U.S. consumer. We have a number of events on deck that the market will be eager to digest:
- Corporate Earnings: October will bring us quarterly earnings reports and future outlooks from CEOs around the world and provide some interesting insights on what they are seeing across the globe in terms of demand.
- Monthly Economic Indicators: Early October brought us a report of slower manufacturing data with a weak reading of U.S. manufacturing activity below what economists had expected. No doubt, a strong dollar is causing some of the this, but the trend bares watching.
- Trade Negotiations: The biggest event for October will likely be the U.S.-China trade discussions resuming October 10th. As these trade issues have been front page news for nearly two years and have caused market swings (up and down). This will be a focal point for the markets in the quarter.
- Brexit Deadlines: If a deal is not negotiated between the United Kingdom and the European Union by October 19th, and the MPs don’t vote in favor of a “no-deal exit,” then the prime minister will need to ask the E.U. for a further exit delay.
We see nothing in today’s market that will move bond yields above 2.0%, as our bonds offer relatively attractive yields given the negative rate environment in most of Europe. Additionally, there are enough folks looking for a safe haven given the backdrop of a slowing economy, political uncertainty with the latest impeachment process, and geopolitical risk including Brexit. The stock market will likely take its ques from the many events on the horizon noted above. We are reminded of last year’s wild ride in the 4th quarter as we sit here at the beginning of 4th quarter 2019. What we remind ourselves and our clients is that volatility, while painful, can be short-lived and recoveries have always trumped downturns as long as the stock market has been around.
As always, your Sandy Cove team is available to answer any questions about the markets or your portfolio.