October 1, 2019
John Augustine, CFA, Chief Investment Officer
Can we get a trade deal?
The third quarter was fairly subdued from a broad index perspective. The major global stock indexes saw returns generally in the +1% to -1% range (ex. Emerging Markets that were lower by 4%), while the major U.S. bond market index gains were positive in the 1% to 7% range (with long-term treasury bonds the best performers).
The sideways movement of markets in the third quarter came from a continuation of the U.S./China trade war mixed with further concerns about the health of the global economy, particularly stemming from Europe.
The Federal Reserve moved from being ‘data dependent’ in its conduct to having more focus on ‘risk management,’ which means trade and global growth concerns in its view. With the new stance, the Fed did cut interest rate twice during the period, which arguably helped stock valuations and bond total returns.
U.S. stocks turned more defensive in the quarter, with large caps – led by Utilities, Real Estate and Consumer Staples – outperforming. Please see the comments in the Equity Section about how our team at Huntington was able to successfully navigate the environment.
Perhaps more interesting in the third quarter were the movements in the bond market. The 10-year treasury yield started the quarter above 2%, fell briefly below 1.5% in August, and finished the quarter at 1.68%. For most of the quarter, the highest yields in the bond market came from the 3-month to 1-year maturity space, which is very unusual. However, credit spreads really did not widen much, so the overall U.S. bond market had a mixed view of the path in the U.S. economy.
During the fourth quarter, the focus will be back on earnings, trade, the Fed, Brexit and the health of the European economy. We suspect markets could be rangebound, but the U.S. economy could see a better tone, led by housing. Please see our comments to follow.