Consistent with the trends we saw earlier in 2019, Q3 showed more geopolitical turmoil and global trade concerns (China, Brexit, etc., ad infinitum!), as well as market-moving “tweet storms.” Economic activity continued to plod along in the U.S. mostly due to strength in consumer spending and improved incomes, but key weakness in the important ISM Purchasing Manager’s Index (PMI) in August caused some pause. Responding to global trade concerns and signs of weakness, as well as the dynamics of a “yield curve inversion,” the Fed took short rates lower with rate cuts in July and September.
The hilly path the capital markets followed over the last year continued during Q3. The “rolling hills” of the S&P 500 showed a small incline in July offset set by a small descent in August. September improved on that trend to show a +1.87% grade with a Q3 total return of 1.70% (including dividends). The Q3 performance amongst other sectors in the capital markets was not symmetrical, however. Small (SCHA) and mid-cap U.S. equities (SCHM) lagged (-2.08% and -0.56%, respectively) while factored carveouts like low volatility (USMV) and high dividend (DVY) outpaced due to the rally in “value-type” stocks (+4.31% and +3.37%, respectively). Also, international developed markets (SCHF) and emerging markets (SCHE), trailed the U.S. market with Q3 returns of -0.72% and -4.23%, respectively. The big winner during Q3 was U.S. real estate investment trusts (SCHH) with a +6.84% total return.
Likewise, fixed income assets tolerated a bumpy uphill ride. After a strong rally in August, core bonds (SCHZ) settled down to produce a +2.31% total return during Q3, while investment grade corporates (LQD) and preferred stocks (PFF) logged better grades of +3.36% and +3.19%, respectively. Lagging core bonds were assets with very short durations such as short corporate bonds (NEAR) with a Q3 return of +0.70%.
So, the ride thus far is helping us get to our goals, but not without some bumps. As I said on my August 23, 2019 blog post, “Buckle your Seatbelts!”:
“In this market environment of jawboning and innuendo, there is no sanctuary; except to be broadly diversified. All those smart guys that overweighted short agency paper anticipating rising rates missed out big time on the benefits of investment grade corporate bonds and aggregate-style core bonds. Duration and high quality credit are the big winners this year on a risk-adjusted basis. Even high yield bonds, emerging market bonds, and preferred stocks proved their worth!”
As a postscript, I am happy to recall and highlight one of my favorite charts of the year; a Wall Street Journal survey showing that not ONE economist forecast lower rates in 2019 (see my June 13, 2019 post here: https://www.dattilioash.com/our-blog/2019/6/13/interest-rate-forecast-foible)!