Third Quarter 2019 Commentary

DATE:  October 1, 2019
FROM: David G. Dietze, JD, CFA, CFPTM, Founder and President
 

I.     Performance Update

The Third Quarter saw markets grind higher, supported by continued strong inflows into this country by investors fleeing negative interest rates and slumping economies overseas.  Two rate cuts by the Federal Reserve in as many months continued to improve stocks’ attractiveness relative to fixed income, allowing equities to achieve yields superior to the Ten-Year Treasury.  The US consumer continued to spend, bolstered by the lowest unemployment rates in nearly 40 years, increasing wages and more hours worked weekly.  The volatile news cycle around efforts by the US and China to hammer out a new trade deal buffeted markets.  However, investors seemed to discount new tariffs imposed by both sides at the start of September in favor of signs that the two nations were warming to reaching a deal in the Fourth Quarter. 
 
MARKET DATA

9/30/2018 to 9/30/2019

Third Quarter 2019

S&P 500 (dividends reinvested)

4.25%

1.70%

NASDAQ (dividends reinvested)

0.52%

0.18%

60/40 S&P 500 / TX-EXEMPT SECURITIES BLEND

6.41%

1.68%

DOW JONES INDUSTRIALS (dividends reinvested)

4.11%

1.78%

INTERNATIONAL STOCKS (MSCI EAFE IX ID)

-1.41%

-1.13%

TAXABLE BONDS (Barclay’s 1-3 Yr Gov’t/Credit)

4.64%

0.69%

TAX-EXEMPT SECURITIES (Barclay’s Muni Index)

8.56%

1.58%

 
Nevertheless, by some measures markets are not all that healthy.  While the Dow and S&P inched up in the Third Quarter, the Nasdaq index slipped by 0.1%, as a September rotation from growth stocks into value stocks denied that index another quarterly gain.  Vanguard's small cap index fund dropped 1.45%.  Markets struggled overseas, too, with a Vanguard international index fund slipping 1.5% while its emerging markets index fund declined 3.6%.
 
Year over year results are also mixed, following the pummeling stocks took in last year's Fourth Quarter.  While the S&P 500 has advanced 4.2%, an index of US stocks smaller than the top 500 (Vanguard Extended Markets Index fund) declined 3.8% and international stocks (Vanguard Developed Markets Index fund) are down 2.1%.  
 
Winners in the Third Quarter reflected the continued theme of safety, bigger is better, and the preference for the US over foreign markets.  Start with the continued flight to the US Dollar; it rose 3.4% in the quarter.  Gold climbed 5.3%.  Long dated US Treasury bonds soared 8.1%.  With interest rates declining and bonds getting expensive, investors shifted into the next best thing in the stock market; Vanguard's Dividend Appreciation Index fund rose 4.2% in Q3, while its real estate index fund jumped 7.4%.
 
Losers in Q3 were led by energy, with the S&P Energy sector declining 7.25%, as investors fretted over a slowing global economy, abundant supplies in the US due to new technologies, and a continuing shift into renewables.  Healthcare, traditionally a defensive sector that benefits from concerns over the strength of the economy, dropped 2.7% in Q3; politicians on both sides of the aisle are determined to brake runaway costs, while some contenders for the White House seek a complete overall of the system, with the moniker "Medicare for All."
 
Bonds have been a big winner this year, including Q3, much to most investors' surprise.  The US Thirty-Year Treasury plunged to its lowest ever, below 1.95%, in August.  The Ten-Year Treasury started the quarter at 2%, dropped below 1.45%, and ended the quarter at approximately 1.7%.  Underscoring that in some cases the thirst for yield is trumping concerns over a possible recession, a high yield ETF advanced 1.2% in Q3 and is up 6.5% over the last 12 months, outpacing stocks.  Preferred stocks worked in Q3, too, up 3.2%, despite their greater vulnerability to an economic slowdown.
 

PREVAILING YIELDS AS OF:

FIXED INCOME ASSET

9/30/18

12/31/18

03/31/19

06/30/19

09/30/19

US Government 10 Yr. Note

3.06%

2.69%

2.41%

2.01%

1.68%

5-Year Certificate of Deposit

1.89%

2.02%

2.02%

1.93%

1.57%

Money Market

1.75%

2.08%

2.13%

2.07%

1.68%

 

II. Looking Forward

October is historically a volatile month.  Of course, so is September, and markets did just fine.  A key date will be October 10, when US-Sino negotiators meet to hammer out a trade deal.  We are optimistic because both sides are incented to reach a deal.  The Chinese economy is cooling; a trade deal would give it a boost.  The US stock market and the economy would get a boost from a settlement, and Trump believes both are important report cards for his reelection.  Other positives for the market include reasonable valuations among many sectors, particularly smaller companies, low interest rates, and a strong consumer.
 

Article Index

Alternative Energy - Published by Donna St.Amant, 10.14.19.
 
 
 
 
 
Feeling InSECURE? - Published by Claire Toth, 7.23.19.
 
Navigating Retirement Income - Published by Claire Toth, 6.21.19.
 
 
Don’t Aim at This Target - Published by Donna St.Amant, 6.21.19.
 
 
 
 
Trade Wars One Year Later  - Published by John Petrides, 5.13.19.

Bargains in the Stock Market's Healthcare Aisle - Published by David Dietze, 4.24.19.

Market Advances to Near Record Highs: Outlook For the Balance of 2019 - Published by David Dietze, 4.15.19.

 

Buy Low Sell High - Published by John Petrides, 4.2.19.

The New Estate Planning - Published by Claire Toth, 4.2.19.

Can the Market Double From Here Before Year End? Publised by David Dietze, 2.20.19.

Avoid these Six Retirement Blunders in 2019 - Published by David Dietze, 2.13.19.

Ten for 2019! Investment Picks for the New Year - Published by David Dietze, 1.8.19.

Deferred Gratification for High Earners - Published by Claire Toth, 1.8.19.

Avoid These Five Investment Mistakes in 2019 - Published by John Petrides, 1.8.19.

Is Value Investing Back in Vogue? - Published by Donna St.Amant, 1.8.19.

Searching Through the Weeds for Investment Opportunities - Cannabis Stocks - Published by Elaine Phipps, 1.8.19.

2019: An Outlook and Expectations in a Volatile Market - Published by David Dietze & Investment Team, 1.2.19.

 

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