MARKET BRIEFS: Q3 RECAP AND Q4 OUTLOOK

Navigating the Crosscurrents   |   Market Review Q3 2019

Market Environment

Crosscurrents have emerged in the outlook for growth, as global economic data is generally healthy but continues to send mixed messages. Services and consumption remain bright spots, even as manufacturing has weakened due to trade tensions. Concerns about slower economic growth have led the Federal Reserve (Fed) to cut short-term interest rates. Central banks in China and Europe have also shifted monetary policy toward stimulus. An imminent recession in the U.S. seems unlikely, given that the data points to a continued, but slower, expansion.

Let’s consider three data points. First, the Leading Economic Index (LEI) points to a continued economic expansion in 2019, albeit at a slower pace. The index is designed to predict future movements in the economy based on a composite of 10 economic indicators (e.g., building permits, unemployment claims, new manufacturing orders, stock prices and interest rate spreads).

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• The third quarter was a bit of a roller coaster ride in the markets with the flight to safety driving market returns. Bonds saw the stronger relative returns across the board for the quarter as investors sought safety amid the growing global tensions. Over the year-to-date period, however, equities continued their winning streak in the developed markets.
• US equities provided the strongest returns for the quarter and year-to-date at 1.7% and 20.6% respectively. In local currency terms, the international developed markets marginally outperformed the US markets for the quarter with a return of 1.8%. But the move in the dollar created a large headwind wiping almost 3% from the return for the quarter. Emerging market (EM) equities saw the weakest relative returns, with Latin America seeing the largest negative returns.
• Within the US, there were rotations toward the more defensive sectors that tend to be impacted by shifts in interest rates. Utilities, real estate and consumer staples were the top performing sectors, each up over 6%. Despite seeing some sharp reversals in September, value continued to trail growth in the large-cap space for the quarter and year-to-date. However, in the small-cap space, the strength of the rally in value was enough to lift returns above growth for the quarter. But for the year, small-cap value continued to be the weakest style.

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