move forward confidently.

Just a sec...

Quarterly Investment Commentary – Q3 2019


MARKET RETURNS:
Stocks delivered mixed results last quarter as international stocks lost ground while U.S. stocks posted gains. Stock price volatility rose in August as renewed trade war fears emerged between the U.S. and China as both threatened new tariffs. While the trade rhetoric between the two nations softened by the end of August, investors sought safety in the form of bonds through a rotation out of global stocks. The Fed cut interest rates twice by a quarter of a percent each during the quarter due to the increasing risks of an economic slowdown exacerbated by trade-related uncertainty. As depicted in the table below, bonds were the best performing asset class during the quarter (as well as for the last 12 months) having benefitted from both Fed action and investor demand. Global bonds were also in demand from investors seeking safety during the period as over $17 trillion of global debt, or 30% of all investment grade securities globally, had negative yields through the end of August.

 

 

LOOKING FORWARD:

U.S. Economy: The U.S. economy is still growing, but growth has slowed to a 2% quarter-over-quarter annualized rate from a more robust 4.2% quarter-over-quarter change this time last year. Without the benefit of a large tax cut (which spurred 2018’s growth) and without a clear fix for longer-term structural issues such as slow labor force growth and low capital investment, it may be difficult for growth to break above 2% from here. Additionally, trade concerns not only effect the U.S. and China, but have also led to slowdowns globally. Decelerating PMI readings (a historically reliable leading indicator which measures purchasing manager activity) have shown up in Germany, the UK, and Japan, not to mention China. A prolonged trade battle between the U.S. and China may continue to cause businesses to delay or cancel planned expenditures, leading to further slowdowns in global growth. However, the U.S. unemployment rate did fall to a 50-year low of 3.5% and wage growth has been steady at a 3.5% rate. Comprising 2/3rds of U.S. GDP, consumer spending remains strong and has been buoyed by the health of the employment market. Given the pullback in business investment spending, any consumer spending reduction will be closely watched due to its potentially large impact.

 

 

Recession Risk: In all, while global economic growth appears to be slowing, the question of whether this will lead to a U.S. recession is still open. We believe that the risk of a recession in the next year or so has moved higher, but one needs to consider the differences between where we are today versus past pre-recessionary periods. Normally leading into a recession the Fed would be raising rates in order to quell inflation, and these rate rise campaigns can sometimes overshoot by creating financial conditions that become tight too quickly. In contrast, this time the Fed has recently cut rates twice and the market expects another rate cut before year’s end, thereby removing the risk of a rate overshoot. Recessions also tend to occur when bubbles have formed and then popped in asset classes – the dot coms in the early 2000s and real estate in the later 2000s are very memorable and recent examples. Today, stock valuations are not extreme, and while bonds are relatively expensive, U.S. yields are still more attractive than many other developed countries across the globe. Outside of a protracted trade war or some other unforeseen event, we believe that if a recession does occur, it may be of the shorter and shallower type given the atypical nature of current economic conditions.

 

Conclusion: The global economy has continued to slow, exacerbated by concerns regarding global trade. While the risk of recession within the next year or so appears higher, we believe it could be of a milder form. Changes in consumer spending will be an important area to watch given its large contribution to U.S. GDP. As always, we will keep you abreast of important developments and communicate any material portfolio changes.

As we enter into the year’s final quarter we want to thank you for your loyalty. As we wrap up our first year as “Opes Wealth Management” this is especially meaningful for all of us here. Have a great holiday season!

 

Index Descriptions:
  • S&P 500 Index TR is a market capitalization weighted index which represents the broad market for large company U.S. stocks. Returns reflect the reinvestment of dividends and do not include advisory fees; the index returns would have been lower if advisory fees had been deducted. The index is not directly comparable to an Opes portfolio. Past performance may not be indicative of future results.
  • The MSCI EAFE Index NR USD is a market capitalization weighted index which represents the broad market for large and mid-sized developed market stocks excluding those from the U.S. and Canada. Returns reflect the reinvestment of dividends and foreign withholding taxes and are translated into U.S. Dollars. The index does not include advisory fees; the index returns would have been lower if advisory fees had been deducted. The index is not directly comparable to an Opes portfolio. Past performance may not be indicative of future results.
  • The MSCI EM Index NR USD is a market capitalization weighted index which represents the broad market for large and mid-sized developing market stocks. Returns reflect the reinvestment of dividends and foreign withholding taxes and are translated into U.S. Dollars. The index does not include advisory fees; the index returns would have been lower if advisory fees had been deducted. The index is not directly comparable to an Opes portfolio. Past performance may not be indicative of future results.
  • The Bloomberg Barclays U.S. Agg Bond Index is a market capitalization weighted index which represents the broad market for taxable investment grade U.S. dollar-denominated bonds. Returns reflect the reinvestment of interest and do not include advisory fees; the index returns would have been lower if advisory fees had been deducted. The index is not directly comparable to an Opes portfolio. Past performance may not be indicative of future results.
  • The US Treasury Bill Auction Avg 1-month is an index comprised of short-term U.S. government-issued investments with yields collected weekly and can be considered a proxy for cash. The index does not include advisory fees; the index returns would have been lower if advisory fees had been deducted. The index is not directly comparable to an Opes portfolio. Past performance may not be indicative of future results.
The opinions expressed in this article are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security. The material is presented solely for information purposes and has been gathered from sources believed to be reliable, however Opes cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Opes does not provide tax or legal advice, and nothing contained in these materials should be taken as such. As always please remember investing involves risk and possible loss of principal capital. Advisory services are only offered to clients or prospective clients where Opes and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Opes unless a client service agreement is in place.