Market Update October 17, 2019
While it was anything but a straight line, the major stock indexes by and large finished the 3rd quarter little changed from where they started. Early August saw some turmoil with the broad stock indexes down in the 6-7% range, as stocks ebbed and flowed with the global trade saga news headlines.
Through the first three quarters, 2019 has been a good year for both stocks and bonds. Stocks as measured by the Standard and Poor’s 500 are up 20.6%, established foreign economy stocks as measured by the MSCI EAFE index are up 12.8%, and emerging market stocks as measured by the MSCI Emerging Markets index are up 5.9%. With bond yields continuing to fall around the world, bonds are having a very good year, up 6.4% as measured by the Bloomberg Barclays U.S. Intermediate Government/Credit Index.
More recently, we have seen a possible thawing in global trade tensions. The U.S. and China agreed last Friday to what I believe is best categorized as a minor truce in their negotiations. I was a little surprised at how well stocks responded (foreign stocks specifically) to what was really a minor accomplishment. I believe this may be an indicator of how much stocks are being held in check by this ongoing dispute. Hopefully this agreement paves the way for a more comprehensive resolution to this conflict.
Across the pond, as they say, it was announced today that Britain and the European Union have reached an agreement on Brexit. It was over three years ago that Britain voted to leave the European Union. Hurdles remain, however, as Prime Minister Boris Johnson still needs to win support of the British parliament and the Northern Irish party. Part of the challenge lies in how to handle trade between Northern Ireland, a British province, and Ireland, a member of the EU. The United Kingdom and EU have an October 31st deadline for Brexit, be it good, bad, or ugly.
It is too early to know with certainty, but it appears a shift may be underway with regards to whether domestic stocks or foreign stocks will lead the market higher. Foreign stocks have gotten off to a very strong start in the 4th quarter, while U.S. stocks have treaded water. On the surface it would appear this is in response to a more optimistic outlook for global trade. Much of this shift may also be attributable to the currency market. The USD as measured by the trade weighted U.S. Dollar Broad Index has risen sharply over the past 8 years, which has not coincidentally coincided with the outperformance of U.S. stocks versus foreign stocks during this time. There was a pause in this ascent in 2017, but since then the USD has been strong, and in August briefly hit its highest level since 2002. This strength is not sustainable in my view, and recently it appears the dollar may finally be rolling over. Whether or not this will be the beginning of a new trend remains to be seen, but it is encouraging that other asset classes could provide some lift for broadly diversified portfolios.
As we enter the holiday season, I hope things are well with you and your family. Do not hesitate to contact me if I can be of help to you.
Sincerely,
Glenn S. Rank, CIMA®
Certified Investment Management Analyst®
President
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· Board of Governors of the Federal Reserve System (US), Trade Weighted U.S. Dollar Index: Broad, Goods [DTWEXB], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/DTWEXB, October 17, 2019. A weighted average of the foreign exchange value of the U.S. dollar against the currencies of a broad group of major U.S. trading partners.
· The S&P 500 is an unmanaged index of 500 widely held stocks that’s generally considered representative of the U.S. stock market. The MSCI EAFE index and the MSCI Emerging Markets index are unmanaged indexes compiled by Morgan Stanley Capital International that are generally considered representative of the developed international stock market and emerging international stock market, respectively. International securities involve additional risks including currency fluctuations, differing financial accounting standards, and possible political and economic volatility, and may not be suitable for all investors. Investing in emerging markets can be riskier than investing in well-established foreign markets. The Bloomberg Barclays Capital U.S. Intermediate Government/Credit Bond Index measures the performance of U.S. Dollar denominated U.S. Treasuries, government-related and investment grade U.S. corporate securities that have a remaining maturity of greater than one year and less than ten years. Inclusion of these indexes is for illustrative purposes only. Keep in mind that individuals cannot invest directly in any index and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor’s results will vary.
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