Headline-driven volatility characterized the third quarter of 2019, with bonds posting higher gains than equities1. The S&P 500 was up 1.7% for the quarter, and bonds1 were up 2.27%.
The Federal Reserve cut interest rates twice during the quarter in response to disappointing economic data and increased uncertainty caused by trade tensions. Manufacturing data was particularly soft, and trade tensions weighed on economic activity. The consumer, however, has been resilient and willing to spend. Retail sales beat expectations during the quarter, and inflation has been contained. The economy continued to add jobs, and the unemployment rate was 3.7% at the end of the quarter. Many large retailers like Target, Walmart, and Lowe’s reported strong earnings during the quarter. Given wage gains, consumer balance sheets were strong, and the savings rate edged up to 8.1 percent.
Christine Lagarde was chosen to head the European Central Bank, and this was seen as a positive for Europe. She brings a wealth of experience as former head of the IMF and is known for her tough yet diplomatic leadership style.
Geopolitical news was decidedly negative and drove much of the volatility during the quarter. The quarter began with news that Iran had breached the terms of the 2015 nuclear deal by enriching more uranium than allowed. Strong rhetoric on both sides and fears of an impending military clash caused brief uncertainty until both sides dialed back. Toward the end of the quarter, a major attack on Saudi Arabia’s oil facilities caused the US to announce sanctions on Iran’s central bank.
While tensions in the middle east caused some of the volatility during the quarter, much of the headline risk came from trade talks between the US and China. Changes week–to–week caused swings in sentiment and volatility in stock markets. Both countries levied additional tariffs on each other, escalating the tensions to a full trade war. A couple weeks after third quarter-end, both sides agreed to resume talks.
Uncertainty over the trade relationship between the US and China have no doubt created a slowdown in the US, but equity markets in emerging markets and China feel the impact to a greater extent than domestic markets. Europe is not involved in the US-China trade dispute but given that its economy and its publicly traded companies, in particular, depend so much on global growth, European equity markets experienced higher volatility during the quarter. Some of this was driven by further uncertainty over Brexit, but much of this was tied to concerns over global growth driven by trade tensions.
Ignore the Noise
The quarter ended with the US House of Representatives launching an impeachment inquiry against the President of the United States. Historically, the stock market has not reacted negatively to notable investigations or impeachments. During the Nixon scandal, markets did fall materially2, but this was during the same period that OPEC announced an oil embargo, and oil and gas shortages created inflation and an economic slowdown.
Long-term, the stock market reflects the health of companies. Headlines out of Washington can create short-term noise in financial markets, but corporate earnings and GDP growth drive long-term market performance. We understand that it’s easier to ignore the noise when you have a financial plan in place. If you would like to review, update, or create a plan, give us a call to discuss.
1 Bonds are represented by the Bloomberg Barclays US Aggregate bond index, and equities are represented by the S&P 500. Investors cannot invest directly in an index.
2 The S&P 500 was down 19.2% between 6/17/1972 and 8/8/1974, the time period which captures the Nixon investigation and resignation.