Markets always face uncertainty because the future is never known. Recent market activity suggests the uncertainty factor is greater than usual with impeachment hearings, drone strikes in Saudi Arabia, and a messy “Brexit” across the pond. U.S. economic growth has cooled to a 2% annualized rate as the sugar high from tax cuts subsides; we are experiencing the first contraction in manufacturing in three and a half years. Exports have also been weak—a casualty of the China trade war. One thing does appear to be clear: markets seem most concerned about how China trade tensions will play out.
The strongest labor market in several decades continued, with the pace of layoffs and the unemployment rate near a 50-year low. And consumer spending has been extremely strong, rising an estimated 4.6% year over year. Adjusted pretax corporate profits were up 3.8% in the second quarter. Some economists believe recession is in the making; others predict that the economy will continue growing to the end of the year at least.
Markets stumbled around during the quarter. Most asset classes declined. No reason to panic, and no reason to be surprised if a bear market were to start tomorrow. History has shown that bull markets tend to be longer and steeper than bear markets, which means that holding on tight in choppy times tends to be the winning strategy.
Asset Class Review
In Q3, US large stocks were up a bit, small and middle market companies lost ground but are still up for the year. Weakness in small stocks sometimes presages recession, though it isn’t a consistent or reliable indicator.
International markets, especially emerging markets, were down for the quarter as trade tensions mounted.
Commodities in aggregate declined for the quarter but is still up for the year. Gold rose, oil declined after a brief spike on news of a drone strike in Saudi Arabia; copper declined and is still down for the year.
The bond market continued its price appreciation as interest rates continued to decline. Many people thought bond rates had reached rock bottom last quarter, and that the inversion of yields could not continue, but they were wrong on both counts. Coupon rates on 10-year Treasury bonds have fallen to 1.69% from 2.69% in January and from 3.09% on year ago.
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