Welcome to Fall. As the final quarter of 2019 begins, we reflect on the closing months of summer and look forward to the months ahead. Market returns were mixed. To date, large company stocks, as measured by the S&P 500, gained 1.70% on the quarter and are up an astonishing 20.55% on the year. Small company and international stocks saw more modest returns and struggled in the 3rd quarter. The Russell 2000, a common small company index, declined 2.41% in the third quarter but is up 14.15% year to date. The MSCI EAFE, a common index for international stocks, slipped 1.00% in the most recent quarter but is up 13.39% year to date. Bonds experienced excellent returns as interest rates continued to fall. Bonds returned 2.27% during the quarter and are up 8.52% year to date as indicated by the Barclays Aggregate Bond Index.
There are favorable signs in the domestic economy. Consumer spending exceeded expectations–growing at an annual rate of 4.3%–and the unemployment rate held steady at 3.7%. Though there are always pockets of weakness, the typical consumer is still spending and confident. This confidence is reflected in corporate America as well. All sectors of the stock market, as measured by companies in the S&P 500, reported earnings for the second quarter resulting in 1.7% year-over-year earnings growth and 3.6% sales growth. Both measures have exceeded analysts’ estimates.
Despite excellent market returns there were plenty of issues impacting markets. The leading conversation through the quarter and through out the year continued to be the ongoing trade tensions with China and its impact on the global economy. Brexit has also returned to the forefront, with a deadline looming and still a broad range of uncertain outcomes. Parliament continues to search for solutions, thus far avoiding a no-deal Brexit.
As trade tensions spark uncertainty for all economies, several central banks have taken action. Over 30 countries in the advanced and emerging markets have cut interest rates this year. In addition, developed markets are witnessing massive capital flows into sovereign debt, pushing down yields across all maturities. In fact, nearly 20% of global government debt carries a negative yield, and these shifts have caused inversions in which shorter-dated notes pay a higher yield than longer-dated bonds. The U.S. Treasury yield curve briefly inverted in August and normalized by September. Many believe inversions are good predictors of an economic downturn, so fears of a recession have increased as a result. While there are many reasons to believe the recent inversion does not necessarily mean a recession is imminent, this development certainly requires investors to be more vigilant.
Market returns across the board are strong this year as our outlook continues to favor risk assets. Valuations are still reasonable as a result of strong corporate earnings. Current expectations do not call for a recession in the near term and we expect interest rates to remain low across the board. As a result, our tactical position remains slightly positive, with a 3% overweight to risk assets with minor rebalancing of our bond holdings to capitalize on favorable higher yielding corporate debt.
There is no shortage of risks to watch, including: trade outcomes, Brexit, and rising geopolitical events in Iran and Hong Kong. We closely monitor the developments with all risk cases and continue to alter our tactical exposures to align with opportunities while at the same time balancing risks.
We are here to answer your questions and assure your current asset allocation remains appropriate for your circumstances. If it has been a while since your last review, feel free to call or email to arrange a meeting with your Hills Bank Wealth Management Officer.Some trust products and IRA contributions/balances are not a deposit, not FDIC insured by any federal government agency, not guaranteed by the bank and may go down in value.