Each new quarter, we take a close look at market performances and economic conditions to understand what is driving markets and to inform our portfolio decision-making. Although rare, this is one of the few quarters where conditions remained virtually unchanged. However, several themes that began to express themselves earlier this year certainly became increasingly entrenched.

For one, the global manufacturing slowdown became more pronounced. Trade flows grew at their weakest pace since the financial crisis, with the ISM manufacturing index reported in at a contractionary 47.8 (Wall Street Journal, “Slowing Trade Hits Global Manufacturing,” 10/1/19). Services also slowed while remaining expansionary. Many blame the on-going US-China trade war and uncertainties surrounding Brexit. A deeper view may also consider the potentially long-lasting overhang on sentiment, capital expenditures and manufacturing activity of the de-globalization these events imply. Further, the inverted yield curve that commenced in Q2 carried over for much of Q3, suggesting increased odds of a US recession ahead. Finally, US-China trade progress was slow at best. Just this week, a “phased” deal was announced with a plan to settle remaining issues – we shall see.

On the positive ledger, the US Federal Reserve began lowering inter-bank lending rates last quarter. The European Central Bank also announced fresh stimulus packages, including an all-time low deposit rate of -0.5% (The Guardian, “ECB announces fresh stimulus,” 9/12/19). Notably, China also added stimulus through banking capital reserve reductions (Market Insider, “China injects stimulus…,” 9/6/19). The common hope of these late-cycle stimulus plans is to preempt global slowing and prolong what otherwise remains the longest economic expansion in history. Finally, the US consumer remained healthy, with spending and personal income growing even as credit growth and confidence waned slightly (Reuters, “US consumer confidence falls…,” 9/24/19).

The net effect of these contrary indications has been erratic, sometimes dramatic daily moves with equities nevertheless remaining near their all-time highs. For the quarter, developed nation stock indices were virtually flat, although emerging markets (‘IEMG’ ETF*) fell nearly -4.7%. The big winners were assets tied to falling rates, including global fixed income (‘BNDX) and real estate (‘RWO’), up +3.0% and +4.8%, respectively. Meanwhile, analysts continue to expect a pick-up in the year ahead even if Q3 earnings confirm a mild forecasted decline. Indeed, after two years of sideways movement for stocks, analysts predict a +13% price increase for the S&P 500 in the year ahead (Factset, 10/14/19). In any event, our models will continue to respond to the market’s ebbs and flows to manage volatility and maximize the odds of reaching your long-term investing goals.

* Not Individual Investment Advice; Dividend-adjusted proxy ETP data from Commodity Systems, Inc. & Allocations as of September 30, 2019; ECA assumes no duty to update any information in this presentation for subsequent changes of any kind.