The U.S. stock market, as measured by the Standard and Poor’s 500 (S&P 500®), made headlines with its volatility in the third quarter of 2019 but, in the end, moved little. The dawn of the third quarter saw the S&P 500® open at 2,941.76. By July 26th, it set a new all-time high of 3,025.86. On September 30th, it finished the quarter only 25 points higher (less than 1%) than it started. The following trading day (October 1st), the S&P 500® fell to 2,940.25, completing a round trip back to its level of 13 weeks before. This movement without progress seems to summarize the story of U.S. markets over the past year. Headlines tout returns of over 20% for stocks year to date. Indeed, from January 1st through September 30th, this is true. However, much of these gains are a recovery from the dismal fourth quarter of 2018. If you look back 12 months to September of 2018, the S&P 500® has returned just over four percent.
Despite not posting any gains last quarter, the market did get its wish for some help from the Federal Reserve (the Fed). Policymakers lowered the Federal Funds Rate twice during the quarter, landing at a target of 1.75% to 2.00%. These are the first cuts to the Fed Funds Rate since December of 2008, when the Fed cut rates to 0% during the heart of the Global Financial Crisis. Federal Reserve Chairman, Jerome Powell, maintained his pledge to “act as appropriate to sustain the expansion.” When the Fed board votes on interest rate policy, they usually act together with unanimity. Unlike past votes, there were three dissents to this rate cut; the first time this has occurred since 2016. Kansas City Fed chief Esther George and Boston Fed chief Eric Rosengren dissented (they dissented in July as well), voting to keep rates unchanged. Additionally, St. Louis Fed chief James Bullard preferred a 0.50% cut.
These rate cuts stand in contrast to most economic indicators. U.S. job growth has been robust, and consumer spending has continued to support U.S. economic growth. The unemployment rate fell from 3.7% in August to 3.5% in September, setting a new 50-year low. We believe these cuts are mainly for insurance against impacts from the current global trade war, as the market is showing signs of weakness related to the trade war. Many pundits believe U.S. and global manufacturing are in recession territory. In September, the ISM Manufacturing Index (the index is often referred to as the Purchasing Manager’s Index (PMI) and is based on a survey of purchasing managers at more than 300 manufacturing firms by the Institute for Supply Management (IS) and measures changes in production levels from month to month), which tracks manufacturing activity each month, declined to 47.8 (levels higher than 50 signal expansion; levels lower than 50 signal contraction). September marked the second month below 50 for the index. The fear is if the manufacturing sector continues its downtrend, it could pull more of the economy down with it. With this news, investors renewed their hope for a rate cut at the next Federal Open Market Committee (FOMC) meeting later this month. However, notes from the September FOMC meeting confirmed that officials remain divided on the outlook for monetary policy, noting the market may be expecting too much easing and needs to realign its expectations.
Any discussion of the third quarter would not be complete without mentioning yield curve inversions. We have seen two yield curve inversions this year. A yield curve inversion occurs when short term rates are higher than long term rates (normally the reverse is true). This first occurred in March when the three month/10-year Treasury yield curve inverted. Most recently, the two-year/10-year curve inverted in August. Because yield curve inversions historically have often (but not always) preceded a recession, concern has grown that a recession is on the horizon. It is important to remember that even if a recession does occur, over the past five decades, the time lag between inversion and recession has varied widely from five months to nearly two years.
The current economic picture is undoubtedly a mixed bag. With recession risk rising, discipline around diversification and rebalancing remains very important. Stocks historically have posted their weakest performance during the six months leading up to recessions. If you have not rebalanced your portfolio back to its strategic asset allocation targets, consider doing so now. Additionally, consider maintaining a position in cash to fund any short-term needs. As always, we are happy to discuss these or any other topics in further detail.
The views and opinions expressed are of Persium Advisors, LLC. This commentary is provided for educational purposes only and should not be construed as investment advice. Persium Advisors is an investment advisor firm located in Atlanta, GA.
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