The U.S. equity market suffered from a bout of volatility during the third quarter, hamstrung by concerns over slowing global growth. Equity markets recovered from a mid-quarter tariff-induced recession scare on the support of Federal Reserve rate cuts but weakened again in the latter part of September on renewed recession worries. As investors sought refuge from the volatility, perceived safe-haven sectors like utilities, real estate, and consumer staples outperformed on the quarter. More economically sensitive areas, namely materials, energy, and transportation stocks, underperformed.
Global bonds continued to rally through the quarter driven by a flight-to-quality response to rising U.S.-China trade tensions and impeachment proceedings launched against President Trump. Deteriorating economic data also pushed sovereign yields tighter as a slowdown in activity, particularly in the U.S. and European manufacturing sectors, stoked recession fears. The U.S. 10-year Treasury slipped below 1.5% in late August, resulting in a yield curve inversion against the U.S. 2-year, which highlights bond investors’ concerns about a possible recession.
Investors are headed into the final quarter of 2019 with a great deal of uncertainty. The economic expansion is now more than a decade old. Its duration, along with its rate of growth, could determine which sectors of the stock market outperform. The most recent rate cuts by the Fed could best be characterized as a “mid-cycle” adjustment for now, but markets will need to keep a close eye on the central bank.
Trade talks with China continue, but no resolution is in sight. This uncertainty could be contributing to a troubling trend of CEOs putting off reinvesting in their businesses until they get some clarity on the near-term outlook. While the day-to-day headlines may cause some swings in sentiment and valuation, these moves often serve as opportunities for our portfolio managers to find bargains.
Notes: The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indexes listed are unmanaged and are not available for direct investment.