Ordinarily, we might expect that stock markets would decline significantly when the President announces hundreds of billions of dollars in unexpected tariffs via tweet and then drone strikes reduce Saudi Arabia’s oil production by 50%.
However, markets are rarely that predictable.
U.S. stocks shrugged off the surprising developments, ending up 1.7% in the third quarter, and now up 20.6% for the year through September 30, as measured by the S&P 500 Index. In addition, the Bloomberg Aggregate Bond Index was up more than 2% for Q3 and is now up more than 8% for the first three quarters of 2019.
Q3’s Most Important Market Drivers
The factors driving the market remain consistent from last quarter despite the sometimes surprising headlines.
The three most important market drivers right now, as we laid out in our second quarter commentary, are:
- Federal Reserve policy
- Low interest rates
- Trade negotiations
Fed policy switched from tightening to easing at the beginning of the year and has only loosened further as the year has developed. We believe Fed policy is a significant factor in the market’s performance this year and believe this will continue.
Lower interest rates, which are partially due to Fed policy, also help support higher equity valuations.
Finally, U.S. and China trade negotiations have continued to cause volatility.
Our outlook remains consistent as well:
- Market conditions remain balanced.
- Interest rates should trend higher over time.
- Trade wars continue to cause volatility.
The notable development this quarter was the continued decline in interest rates and discussion around potential negative rates in the U.S. The U.S. Treasury 10-year yield touched 1.43% in early September before recovering to 1.68% to end the quarter.
While Germany and Japan have had negative rates for a while, there’s now much more speculation that negative interest rates will develop in the U.S. as well. While there’s no reason it can’t happen, we do not believe we will see negative rates in the U.S. in the near future (barring a significant and unexpected downturn in the economy).
Multiple factors go into interest rate levels, and foreign interest rates are just one. Remember, Japan has had near zero interest rates for decades while the rest of the world has had much higher interest rates.
What Does This Mean for Your Portfolio?
Curi Capital recommendations remain consistent as well.
Any outstanding household debt with interest rates significantly higher than today’s rates should be refinanced to take advantage of current low rates.
We also recommend favoring short-term fixed income in portfolios. Short-term fixed income will not give you the same pop should rates continue to go lower; however, they will hold up much better if and when rates do rise.
Finally, we recommend a long-term investment approach. As in the past, the biggest lesson from this past quarter is that the only certainty is uncertainty. News events and the market’s reactions to those events are constant unknowns. In order to prosper in such a world, investors must build a portfolio that succeeds in various unpredictable environments, including periods of market stress.
While we can’t know when a market decline is coming, we do know they come from time to time. If you have questions about recent market performance or would like to review your current portfolio, please reach out to our Curi Capital’s Wealth Management team at 984-202-2800.
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