Imagine you turn on the business news channel, and the host says, "Well folks markets are perfectly ordinary today. Therefore we have nothing to talk about, and we will use our time to play old clips of Elon Musk promising new technologies". This instance will never happen. No matter the day, month, or quarter there will always be an overwhelmingly large number of both positive and negative business news headlines. Quarter 3(Q3) 2019 was certainly not an exception to the rule. What we must remember is that the number of headlines does not matter but whether or not those headlines have a material impact on markets or not matters.
If we take a look back at the key stories of Q3, there are three headlines that stand out to me as being material to markets.
The 10 Year Treasury Rate Collapsed.
Attacks on oil fields in Saudia Arabia.
The Trade War Continues.
The market wants the Fed to cut rates and keep U.S. interest rates more competitive relative to international markets, which are by and large negative. The 10 year treasury rate started the Quarter at 2.03% before bottoming out at 1.47%. This was a dramatic plunge and it began to raise recession red flags. By quarter-end, rates had stabilized with the 10 year hovering at 1.67%. Long term interest rates are a crucial market component; however, it is fairly common for interest rates to change quickly. As you can see from the chart below, the broad stock market was not materially impacted by the wild changes in rates.
Let’s be clear, 20 years ago this would have been a huge deal. Today the U.S is the world's largest energy producer, and despite this being a massive geopolitical problem markets took this problem in stride. The chart below shows almost no correlation between stocks and the price of oil in Q3. In fact, oil finished the quarter less expensive then it began.
To me, this is the most material and disappointing news of the quarter. There was ultimately no positive movement on this topic for the quarter and no longer can it be denied that the trade war is impacting the economy. Throughout the quarter we saw multiple statistics that indicate the trade war is slowing the growth rate of the global economy. In particular, manufacturing activity has contracted and services industries seem to be slowing. In our view, the trade war is not going to take down the U.S. economy in the near future; however, we do believe the longer this goes on the more of a hindrance it is on markets.
Despite the negative economic news related to the trade war, we have witnessed some excellent employment data as of late. Including the recent news that unemployment is currently at 3.5%, which is the lowest level since 1969. A low unemployment number is indicative of a healthy consumer which in turn bodes well for the economy. The U.S. has been in the fast lane on economic growth for some time now and, inevitably, we will eventually merge to the slow lane. The slow lane does not indicate an economic crash or great recession it is merely part of the economic cycle.
As far as the markets are concerned, Q3 was a slightly disappointing mixed bag. Large-Cap U.S. stocks finished the quarter up along with bonds; however, diversifying assets classes such as Small-Cap, Mid-Cap, and International stocks experienced negative quarters.
As we enter the fourth quarter, most investors will be watching for any positive movement on trade and for another rate cut from the federal reserve. Most believe that another fed rate cut is inevitable, but a resolution on trade is anything but a given. The best course of action for investors is to focus on the long term picture. We could try to predict when there will be a trade resolution or how markets will react to the next Fed statement, but we all know that it's a fool's errand. If we focus on disciplined investing, asset allocation, and cost-conscious implementation, we know we will be on the right path.
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Written by Brice Carter