2019 Third Quarter Market Review

Updated : Oct 24, 2019 in Articles

2019 Third Quarter Market Review


I’m Brian Perry, Director of Research here
at Pure Financial. Welcome to the Q3 market update and the third
quarter was a quarter marked by continued volatility, continued uncertainty around the
economy and whether or not the economic expansion would continue. Also, continued concerns about trade wars
between the U.S. and China, as well as some unrest in the Middle East and attacks on some
of the oil depots in the Middle East, in Saudi Arabia in particular. Against that backdrop we saw a mixed performance
from investment markets. The star performers in Q3? Drumroll please: bonds. Boring old bonds, the number one performer
out of major asset classes. In fact U.S. bonds were up 2.27% in the quarter. A very, very strong performance in a single
quarter for bonds. Looking over a one year time frame, the U.S.
bond market up 10%. Very, very strong performance from bonds as
interest rates have continued to fall. And even if we shift internationally in bonds,
we’re in a world with many, many low interest rates. In fact, there are almost 16 trillion dollars
of bonds in the world with negative interest rates. That’s right, almost 16 trillion dollars worth
of bonds yielding less than zero. A mind-boggling concept to be sure. The fact that somebody is paying someone in
order to lend them money. It seems like we’ve fallen through the looking
glass at this point, but that’s where we’re at. When we look at the U.S. bond yields, even
though the 10-year Treasury is only around one and a half percent or so, that’s higher
than most other developed countries. In Germany and Japan, which are two of our
closest economic peers, Germany, almost all of their government bonds have negative interest rates. And in Japan, many of their government bonds
also have negative interest rates. So by comparison, U.S. yields are relatively attractive. Nevertheless international bonds did well
last quarter too, up more than 2%. A continued argument for some of the global
bond diversification that we believe makes sense in portfolios. Turning to the stock market, we experienced
a mixed quarter where U.S. stocks did well, but international stocks didn’t do as well. In the US, the main index, the Russell 3000,
was up about 1.16% percent while international developed stocks fell slightly less than 1%. Emerging market stocks down about four and
a quarter percent. That performance continued a 12 month theme
in which U.S. stocks have outperformed international stocks. And although that we’ve had a good year for
U.S. stocks in 2019, if we stretch that time period back three months further to the fall
of last year, right before a fairly sharp Q4 correction, we see that in the last 12
months U.S. stocks are actually up just shy of 3%, while international stocks down around
1% and emerging market stocks down around 2%. If we look at various asset classes in Q3
the best performer was actually real estate. Real estate investment trusts, often known
as REITs, were the star performers. REITs were up nearly 7% in Q3 with the S&P
500 up about 1.7%. Worst performers were the emerging markets,
down six and a half percent for emerging markets value, and about four and a quarter percent
for the broader emerging markets. Of course, this is in the context of what
was the best performing asset class just a year and a half ago, when in 2017, emerging
market stocks were up more than 35%. So what can be the best, as history often
shows us, can also turn around and not do as well. So when we look at the factors that historically
have led to higher security performance over the long run, namely, small versus large and
value versus growth, we’ve been in an environment where one of those factors has been contributing
to portfolio performance in the last three and twelve months, that being value, and small
actually has not been contributing to performance. So we’ve been in an environment where larger
companies have been outperforming smaller companies. And of course, that’s perfectly natural. This happens all the time. These are factors that, historically, have
played out over a very long time periods. But just as with any probability, there are
plenty of periods in which smaller companies don’t do as well as larger companies, and
frankly, value companies don’t do as well as growth companies. As you might suspect with international markets
underperforming the US, a number of international markets actually posted negative Q3 performance. And a big contributing factor to that was
the stronger U.S. dollar. In particular, Hong Kong was a weak performer
in Q3 down 11.6%. Of course, with Hong Kong, some of that has
not as much to do with the global economy as with specific factors, with the riots continuing
and the protest continuing in Hong Kong. That’s led to turmoil in that market. The best performer in Q3: Belgium, up about
three and a half percent. And then among larger markets, Japan up more
than 3% as well. In emerging markets the best performers were
Turkey and Taiwan followed by Egypt and the United Arab Emirates. As I mentioned, many currencies depreciated
against the U.S. dollar, and as a reminder, when the US dollar appreciates that tends
to harm international stocks returns for U.S.-based investors. And when the US dollar weakens it tends to
be a positive for U.S. investors. And so in Q3 we saw an environment in which
the US dollar tended to appreciate against a lot of currencies. In fact, among the only currencies that were
actually up against the U.S. dollar were the Israeli new shekel, the Egyptian pound, the
Turkish lira, and the Pakistani rupee. Some of the weaker performers were what are
often known as the commodity currencies, and so these are countries that are large exporters
of either oil or other natural resources. And there, we saw the New Zealand dollar,
the Norwegian krone, the Australian dollar, all weaker against the US dollar as commodity
prices and oil in particular generally fell last quarter. In the last quarter, interest rates continued
to decline. The five year Treasury declined by 21 basis points. The 10 year treasury by 32, and the 30 year
treasury by 40 basis points. In fact, in the last year, yields are down
quite sharply. A year ago this time, we had what’s known
as a normal yield curve, where for the longer out that you invested, the more interest you got. Now we’re in, at least in the shorter part
of interest rates, what’s known as an inverted yield curve where you get more return for
investing short than for out a little bit longer. That’s a relatively unusual phenomenon and
one that’s often cited in the press as a potential precursor for a recession. It is true that oftentimes a recession is
preceded by an inverted yield curve, and there are several reasons for that. And it’s not that the yield curve causes a recession. It’s just that it can give a clue as to a
potential recession. But it is important to remember that on average
there’s almost a year and a half to two years that go in between when the yield curve inverts
and when the economy tips into a recession – that’s one. The second thing that’s important to remember
is that there have been instances in which the yield curve inverted in which we didn’t
go into recession. And then the third point is that during the
period in between the inversion and when the economy tipped into recession, the average
return on stocks has been somewhere in the mid-teens. So although it is certainly possible and,
in fact, certain that we will eventually go into recession, inverted yield curve or not,
that doesn’t necessarily in and of itself give us knowledge as to what markets may do
over the course of the remainder of 2019 or into 2020. This has been the Q3 market update. Again, I’m Brian Perry, Director of Research
here at Pure Financial, and for more on this or any other topic, visit us at PureFinancial.com.

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