The 3rd quarter of 2019 saw the US stock market trade in a narrow range, with the S&P 500 index ultimately closing 1.62% off its all-time high mark set on July 26th. The halting progress obscures the very strong year-to-date S&P 500 return of 18.75%, most of which was posted in the first three months of the year. In contrast with equities, the US bond market rallied strongly in Q3, particularly within the high quality corporate and US Treasury sectors. The Bloomberg Barclays Aggregate Bond Index gained 8.47% over the first three quarters of 2019. Laggard sectors included small cap stocks and international equity markets, both of which posted negative returns for the quarter.
Continued strength in the bond market is perhaps the most surprising development so far this year. None of the pundits forecast lower bond yields and interest rates twelve months ago, but continued economic struggles in Europe and China have Wall Street traders looking to the Fed for support to stave off recession at home. The popular media narrative of a tariff-induced economic game of chicken threatening to drive the US economy into the ditch would seem to explain the recent strength in bonds and weakness in stocks, but this could prove to be a too-pessimistic outlook.
For every data point indicative of a slowing economy, there are multiple indicators of continued expansion. The Fed’s recent quarter-point cut in the Fed Funds Rate was described by its Board of Governors as “precautionary” in nature, so it’s still fair to wonder whether the economy needs lower interest rates to continue growing. Negative interest rates in Japan and parts of the Eurozone have failed to buoy those economies, after all. It’s anyone’s guess as to why the media focuses only on the negative, but we’re not ready to buy into the recession-is-just-around-the-corner script just yet.
2019 is now three-quarters in the rear-view mirror, and financial markets have posted solid to strong gains across the board despite waning momentum in US equities over the last six months. But volatility has remained within normal ranges, and US consumers are in far better financial shape than they were in 2007 before the onset of the Great Recession. The fourth quarter is historically strong for the stock market, but Q4 2018 was an exception when the S&P 500 index fell 15.8% . . . so anything is possible.
by Steve Conard, CFP®
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful. Stock investing involves risk including loss of principal. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price. The Bloomberg Barclays U.S. Aggregate Bond Index is an index of the U.S. investment grade fixed-rate bond market, including both government and corporate bonds.