During third quarter, US equities outperformed non-US developed markets and emerging markets. In the US, value stocks outperformed growth, but the opposite was true for non-US and emerging markets. Small cap stocks outperformed in non-US developed markets but lagged in the US and in emerging markets. REITs outperformed equities in the US and internationally.
US interest rates declined in the third quarter, with the yield on 10-year treasury notes falling to 1.68%. This trend was consistent with decreasing rates in most developed markets. Short and intermediate-term nominal rates are negative in Japan and across the entire yield curve in Germany.
Lower interest rates are generally supportive of stocks, since they increase the present value of a firm’s future cash flows. At least for now, the US housing market remains strong, with lower rates and increased refinancing that should create more consumer spending power. Consumer confidence remains strong and high yield credit spreads are well contained.
On the other hand, corporate profits are weakening, with global earnings revisions remaining negative. S&P 500 companies with large global revenue exposure are expected to report a year-over-year decline in revenues due to trade concerns. Perhaps most worrisome, manufacturing data shows declining activity. However, most observers attribute this to uncertainty tied to trade friction and not a lack of consumer demand - yet.
We have been focused on risk in client conversations for the past year and we continue to believe that maintaining a diversified portfolio, both across asset classes and factor premiums is extremely important. Recessions are a normal part of the business cycle, but timing them is almost impossible. By being systematic and disciplined about maintaining a portfolio that is within your risk tolerance and that supports your financial planning goals, you can weather most storms. As always, we urge you to discuss this with your advisor - contact us.
View our Q3 2019 Market Review.
J. Brent Everett
Chief Investment Officer
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