3Q 2019 Market Summary

Equities

Global equity markets were a mixed bag during the third quarter of 2019. While large cap domestic stocks continued their slow and steady grind forward, small cap U.S. stocks and non-U.S. equities experienced declines. The S&P 500 Index returned 1.7% during the quarter and is up 20.6% year-to-date through September 30. The impressive year-to-date return for the S&P 500 marks the best first nine months of a calendar year since 1997, however much of this gain came during the first quarter of the year.

Consumer staples, utilities, and real estate sectors were winners during the quarter, while energy, basic materials, and healthcare stocks lagged. Value and growth stocks were neck-and-neck during the quarter, although the month of September saw a shift in market sentiment following a temporary spike in oil prices, which allowed value stocks to outperform growth for the month. Year-to-date, the Russell 1000 Growth Index returned 23.3% compared to 17.8% for the Russell 1000 Value Index.

The Russell 2000 Index (representing small cap stocks)dropped 2.4% during the quarter, while the Russell Microcap Index declined 5.5%. The negative quarter for smaller companies contributed towards the continued divergence from larger companies. Over the trailing 12 months ending September 30, the Russell 1000 Index (representing large cap stocks) has lost 8.9% of its value, microcaps are down almost 16%, while the S&P 500 returned a positive 4.3%.

Non-U.S. stocks continued to lag domestic large cap stocks. The MSCI EAFE Index dropped 1.0% during the quarter, but returned 12.8% year-to-date. Emerging markets also struggled, with the MSCI Emerging Markets Index down 4.3% during the quarter and up only 5.9% year-to-date.

Fixed Income

The Federal Reserve lowered its key Federal Funds rate for the second time this year in September, down to a range between 1.75% and 2.00%. This easing caused interest rates to decline across the yield curve during the quarter. One-year Treasury yields dropped 0.16% during the past quarter to 1.77% while 10-year yields dropped 0.32% to end the third quarter at 1.68%. Ten-year yields have dropped a full percentage point since the beginning of 2019.

As interest rates declined across the yield curve, most fixed income sectors generated strong returns. The Bloomberg Barclays U.S. Aggregate Bond Index rose 2.3% during the quarter and is up 8.5% year-to-date. High quality corporate bonds were especially impressive during the quarter with the Bloomberg Barclays U.S. Corporate Bond Index returning 3.1% during the quarter and 13.2% over the past nine months. High yield bonds lagged investment grade corporate bonds but still generated robust returns of 1.3% for the quarter and 11.4% year-to-date. Municipal bonds also benefited from declining interest rates, returning 1.6% during the quarter and 6.7% year-to-date.

The Bloomberg Barclays U.S. Aggregate Bond Index returned 3.1% during the quarter, while the Bloomberg Barclays U.S. Corporate Bond Index returned 4.5%. The Bloomberg Barclays Municipal Bond Index returned 2.1% during the quarter. Lower-quality bonds continued to generate decent returns as the Bank of America Merrill Lynch U.S. High Yield Index returned 2.6% during the quarter.

Commodities

The Bloomberg Commodity Index fell 1.8% during the quarter despite surging gold prices. The LBMA Gold Price Index returned 5.4% during the quarter and 14.6% since the start of 2019. Oil prices fell during the quarter from $59 to $54 for a barrel of WTI Intermediate crude oil.

Summary

Equity and bond markets continue to send conflicting signals. Bond markets are flashing a clear warning sign as rates plunged largely due to expectations of an economic slowdown. Headline risk also remains high, largely due to geopolitical events including impeachment talks in the U.S., BREXIT, Hong Kong protests, and oilfield attacks in Saudi Arabia.

However, while volatility returned to the stock market in recent months and small cap stocks have struggled, U.S. large cap equities remain near all-time highs, suggesting some investors remain optimistic about the near future.

Rather than attempting to predict short-term economic outcomes, investors should continue to focus on their long-term investing goals. In equities, that means focusing on the subset of high quality companies trading at reasonable valuations based on their long-term earnings prospects. For bond investors, that means avoiding the temptation to reach for yield, and instead focus on capital preservation.

 
Sources: MorningStar and Federal Reserve Bank of St. Louis
Important Information:
The Standard & Poor’s 500 Index, often abbreviated as S&P 500, is an American stock exchange market index based on the market capitalizations of 500 large companies having common stock listed on the NYSE or NASDAQ. The S&P 500 index components and their weightings are determined by S&P Dow Jones Indices.
The Russell 1000 Index is an index of approximately 1,000 of the largest companies in the U.S. equity market. The Russell 1000 is a subset of the Russell 3000 Index. It represents the top companies by market capitalization.
The Russell 1000 Growth Index is a broadly diversified index predominantly made up of growth stocks of large U.S. companies.
The Russell 1000 Value Index is a broadly diversified index predominantly made up of value stocks of large U.S. companies.
The Russell 2000 Index is a small-cap stock market index of the bottom 2,000 stocks in the Russell 3000 Index. The index is maintained by FTSE Russell, a subsidiary of the London Stock Exchange Group.
The Russell Microcap Index measures the performance of the microcap segment of the U.S. equity market. It includes 1,000 of the smallest securities in the Russell 2000 Index based on a combination of their market cap and current index membership and it also includes up to the next 1,000 stocks.
The MSCI EAFE Index is a stock market index that is designed to measure the equity market performance of developed markets outside of the U.S. and Canada.
The MSCI Emerging Markets Index is an index designed to measure equity market performance in global emerging markets.
The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market.
The Bloomberg Barclays US Corporate Bond Index measures the investment grade, fixed-rate, taxable corporate bond market. It includes USD denominated securities publicly issued by US and non-US industrial, utility and financial issuers.
The Bank of America Merrill Lynch High Yield Bond Index tracks the performance of below-investment-grade U.S. dollar-denominated corporate bonds publicly issued in the U.S. domestic market.
The Bloomberg Barclays U.S. Municipal Index covers the USD-denominated long-term tax exempt bond market. The index has four main sectors: state and local general obligation bonds, revenue bonds, insured bonds and prerefunded bonds.
The LBMA Gold Price Index is the global benchmark for unallocated gold and silver delivered in London.
The West Texas Intermediate (WTI) oil, also known as Texas light sweet, is a grade of crude oil used as a benchmark in oil pricing. This grade is described as light because of its relatively low density, and sweet because of its low sulfur content.
The Bloomberg Commodity Index (BCOM) is calculated on an excess return basis and reflects commodity futures price movements.