2019 4th Quarter Investment Bulletin

The U.S. stock market produced modest growth during the 3rd quarter of 2019, while U.S. bonds powered ahead with a return that was double the stock market return. The rise in bond prices is directly attributable to a decrease in interest rates. The U.S. Aggregate Bond index now has a year-to-date return of 8.51%. In fact, over the last year, 10/1/2018-9/30/2019, bonds have a total return of 10.27% compared to a 2.78% return for U.S. stocks.

The S&P 500 generated significant gains between 2013 and 2017 but has been stuck in a narrow range since early 2018. In the first chart below you can see the significant rise in stocks during that five-year period. However, when you look at the second chart you can see a lot of overall movement, but not much of an increase overall between early 2018 and present day. The S&P 500 closed at 2872 in late January of 2018 and currently is trading around 3000 which is only an increase of 4.5%.

Chart 1: S&P 500 (SPY) growth over the 5 year period: 2013-2017

Chart 2: S&P 500 (SPY) growth between late January 2018 and early October 2019

As we enter the 4th quarter of 2019 it seems to us that there are three main themes driving the stock and bond markets. First, the impact that the ongoing trade battles will have on economic activity is a constant challenge to assess properly. Second, the growing evidence that manufacturing output is declining, and thus increasing risk of recession. Lastly, how effective governments across the globe will be able to manage the situation. The precipitous decline in interest rates in the bond market is a form of economic stimulus and continues to drive the equity markets forward. Eventually peak-unemployment and decelerating earnings will usher in the next recession.

Looking into the last quarter of 2019 and beyond, we remain cautiously optimistic about economic growth continuing and the markets continuing to rise. Our portfolios are positioned to participate in the stock market gains, but taking risks into account. The Fed has been using the term “soft landing” in describing what the next recession could be. If history tells us anything, recessions tend to be short-lived. We remain vigil.