Q3 2019 Market Recap
There is an old adage in investing that you “Sell in May and go away”. The idea is that during the summer markets can be directionless and volatile. That would not have been a great idea in 2019. What we’ve seen is a more volatile market for the 3rd quarter, but higher than the end of May. So, it makes that adage seem a bit outdated. That being said the markets struggled in comparison to the first two quarters of 2019. Large Cap Stocks as measured by the S&P 500 were up 1.70% for the quarter but are up 20.55% for 2019 year to date. The continuation of the trade war weighed heavy on markets. The Federal Reserve lowered rates in response to concerns of a global economic slowdown, which helped in the short term, but it appears that the market is wanting for more.
Elsewhere in the US market, we saw Mid Cap Stocks, as measured by the Russell Mid Cap Index, underperform Large Cap Stocks for the quarter with a return of .48%. However, they are still outperforming their large cap brethren for the year at 21.93%. Small Cap Stocks, as measured by the Russell 2000 Index, turned negative with a -2.40% return for the quarter. They are still up for the year but trailing Large Cap and Mid Cap with a 14.18% return. Given that we are late in the economic cycle we would expect Small Cap stocks to underperform larger stocks and we would expect more volatility in Mid Cap stocks.
International Markets continued to underperform the US market. The MSCI-EAFE Index returned -1.07% for the quarter and is up 12.70% for the year. Continental Europe has been dealing with a slowing economy, trade tensions, and uncertainty about Brexit. The United Kingdom continues to be dominated by Brexit. After the end of the quarter it appears that the Boris Johnson government may have an agreement with the EU, but that must be approved by Parliament, which is the same problem that Teresa May’s government struggled to get done. The trade war and the global slowdown really hurt Emerging Markets which were down -4.25%. These economies, which are export dependent, are hurt tremendously by trade uncertainty.
The bond market was a bright spot. The Barclays Aggregate Bond Index was up 2.27% for the quarter and is up 8.52% for the year. Much of this has been due to the longer portion of the yield curve, maturities over 5 years, dropping dramatically. The 10-Year Treasury moved from roughly 2.00% to 1.70% during the quarter. Additionally, the Fed lowered Fed Funds twice during the quarter, which drove all rates down further.
With this backdrop we have continued to make some changes to portfolios. We continue to favor Equities over Fixed Income. In Equities, we have lowered our exposure to International Equities and Small Cap to be underweight the benchmark weight. We have mainly overweighed Large Cap stocks with this move. In Fixed Income, we have extended maturities to take advantage of the price movements in bonds. We have upgraded the credit quality in our Fixed Income portfolios.
We continue to be positive on the US economy and US markets. While we are concerned about the potential for a slowing US economy, we don’t see anything yet requiring us further changes. We are closely watching the 3rd quarter earnings to see if we see anything that surprises us.
Speaking of surprises, we were pleasantly surprised that in early October we saw Charles Schwab and TD Ameritrade, our two custodians, cut commissions on Stocks and Exchange Traded Funds (ETF’s) to $0.00 from $4.95. This directly impacts you, reducing your transaction costs. We are evaluating what this means for how we implement our investment process going forward. It is important for us to adapt to changes in the marketplace. As we make these evaluations, we will continue to communicate any changes we make to you. As always, if you have any questions please contact your advisor.