As we embark on the fourth quarter of 2019, the current U.S. expansion set a longevity record when it turned 10 years old this past March. If the current market cycle was a baseball game, we are likely in the bottom of the 12th in extra innings.
After an impressive move higher during the first half of the year, risk assets saw little movement to the upside in the third quarter. The S&P 500 peaked on July 26th only to slide back over the following trading days as once again investors had to digest trade war concerns. The ten-year Treasury bond price rose as yields fell from a peak slightly above 2% to a low of 1.45% and then climbed slightly at quarter-end to yield 1.70%. Real Estate, the rate-sensitive equity sector, produced solid returns of 7-8%. Meanwhile gold continued to move higher, finishing the quarter around $1500 per ounce, for a gain of 8-9%. As the quarter ended, the S&P 500 was able to regain some ground, and finished very close to where it started.
To only look at the large cap domestic market, you would think all is well with the world. However, smaller domestic stocks, emerging market stocks, most commodities, foreign stocks, and virtually every bond market in the world are telling a story of a slowing global economy and increasing risks of global recession. Thus far, domestic large cap stocks have managed to remain the outlier from this trend due to a variety of factors ranging from corporate tax cuts to the fact that the S&P 500 Index may offer a higher yield than many bond markets around the globe.
The most significant market news during last quarter was that the Federal Reserve reversed course (again) and lowered short-term interest rates twice, once in July and again in September. Federal Reserve Chairman Powell’s reasoning was that the FOMC acted in response to signs of a continuing global economic slowdown, particularly outside the U.S., as well as the ongoing uncertainty surrounding the U.S. / China trade tensions. Additional rate cuts are widely expected to come before year end, and investors are pricing in another rate cut by December leaving global investors to question will it be too late, or even be enough.
The main economic risks today seem to be coming from the political sphere which is tough to gauge. In the Middle East, tensions were up after the latest attack on oil processing facilities in Saudi Arabia. The U.S.-China trade challenges continue with sporadic hopes for a final resolution. A separate trade war between South Korea and Japan has the potential to escalate into something much more dangerous. An impeachment inquiry into President Trump has been opened. The Brexit saga seems to just keep going. Depending almost entirely on how efficiently markets are pricing in all of these risks, this collection of potential negatives could either turn bullish or very bearish.
As we enter the 4th quarter, we remain cautiously optimistic and believe central banks will continue to support stocks with unconventional easing measures taking us into unchartered waters. The world has never before seen the economic and expansive monetary conditions that exist today, and there is no playbook for how this is likely to ultimately impact the world’s economies and markets, particularly when interest rates eventually move higher.
All in all, despite this array of potential concerns, domestic equity markets are down only modestly from all-time highs, and price-to-earnings multiples remain at notably higher than average levels on both a trailing and forward-looking basis. In addition, mutual fund cash levels, while above the 10-year averages are still sitting at only 5.1%, which certainly does not reflect an immediate risk-off mentality.
How long will this market cycle continue? Although we know we are in ‘extra innings’, no one knows when the game will end and when a new cycle begins. (The longest baseball game in major league history was a 26 -inning affair between the Brooklyn Robbins and Boston Braves on May 1, 1920.) An understanding of where we are in the market cycle, combining sound financial planning with a strategic and tactical investment approach, should account for the best results going forward.
Finally, on a more personal note, please join us in celebrating our team member and Certified Financial Planner designee: Donna Monda, CFP! While providing excellent client service, Donna has successfully completed several hours of exams and hundreds of hours of study. We couldn’t be more proud of her outstanding professional accomplishment.
Eric W. Kendrick, CFP