3rd Quarter 2019 Update
October 28, 2019
- While growth has moderated somewhat in 2019, the current US economic expansion is now the longest in history.
- The FOMC responded to the moderating growth in the US by lowering interest rates twice during the quarter, bringing the target federal funds rate range to 1.75%-2.00%.
- Since the economic impact of the trade war arguably has been worse for China, economists hope that some sort of compromise may be in the offing, particularly as President Trump heads into an election year.
- It is somewhat difficult to assess the importance of the recently inverted yield curve. While inversion has typically presaged a recession 9-12 months in the future, analysts are not quite as confident in this environment, believing that unprecedented foreign demand for US Treasury securities may be creating distortions in the curve
The Global Economy
The Bureau of Economic Analysis released the third estimate of the second quarter 2019 real GDP, a seasonally adjusted annualized rate of 2.0%, lower than the first quarter’s 3.1% annualized growth, and in line with the prior estimate. It was the lowest annualized growth rate in the past eight quarters, with the exception of the fourth quarter of 2018. Trade issues were the primary driver of the quarter’s slowdown, but the effects of last year’s fiscal stimulus have also dissipated. Corporate profits rose by 3.8% (not annualized) during the quarter, while real disposable income rose by 1.8%.
Economists pointed to the fading benefits from 2018’s deficit-financed tax cuts and the Trump administration’s trade war with China and other trading partners as being the key reasons for the slowdown, as they combined to undermine business sentiment. Some analysts estimate that the trade war with China has resulted in a reduction in real GDP of 0.3 percentage points, and a loss of 300,000 jobs. Since the economic impact of the trade war arguably has been worse for China, economists hope that some sort of compromise may be in the offing, particularly as President Trump heads into an election year.
Below, we’ve highlighted broader market returns for the 3rd quarter and year-to-date time periods:
|MSCI Emerging Markets||-4.1%||6.2%|
|DJ US Select REIT||6.8%||24.6%|
|Barclays 5 Year Muni||0.5%||4.3%|
Fixed income securities’ prices and yields were buffeted by several factors during the quarter, foremost of which was the deceleration in economic growth resulting from the escalation in the trade war with China. Other issues prompting investor concern were the ongoing drama surrounding the UK’s Brexit decision, and geopolitical tensions with nations such as Iran. The FOMC responded to the moderating growth in the US by lowering interest rates twice during the quarter, bringing the target federal funds rate range to 1.75%-2.00%.
The yield curve briefly inverted during the quarter, meaning that the yield on the 10-year Treasury declined below the yield on the 2-year Treasury. Historically, yield curve inversions have predicted economic recessions 9-12 months in the future. Some analysts, however, point out that the current situation may differ from previous instances in that there is heavy demand for U.S. Treasury debt because of low (or negative) yields on sovereign debt issued by other nations. Such demand drives up the prices of the fixed income securities and lowers the yield.
Equity markets tracked the news on the trade front, posting gains in July before dropping sharply in August before recovering in September as both the US and China seemed to soften their respective stances. The market’s recovery was also partly based on the FOMC’s decision to lower interest rates for the second time in the quarter.
International stocks had a difficult time during the quarter and were generally not able to match the performance of U.S. equities. In the Eurozone, economic growth has slowed for several reasons, including ongoing uncertainty around Brexit and the impact of global trade tensions and geopolitical fissures.
While growth has moderated somewhat in 2019, the current US economic expansion is now the longest in history. The US economy is very resilient, so far withstanding the negative impact of the heated trade war, heightened tensions with Iran and the deep and growing political divisions in Washington. While the FOMC has stepped in to provide an insurance policy to the markets in the form of two interest rate reductions, growth is dependent on a cooling of the tariff tit-for-tat. Many economists believe there is reason to feel optimistic that President Trump and China’s President Xi Jinping will soon find common ground, as China’s economy has slowed significantly and President Trump seeks re-election next year.
It is somewhat difficult to assess the importance of the recently inverted yield curve. While inversion has typically presaged a recession 9-12 months in the future, analysts are not quite as confident in this environment, believing that unprecedented foreign demand for US Treasury securities may be creating distortions in the curve. In addition, stock prices do not yet seem to be signaling a recession is on the horizon, as they have recovered from an August swoon to once again approach record highs. The consensus among economists is that at this point a recession does not seem likely until near the latter part of 2020.
Information provided is for informational purposes only and should not be construed as investment advice. The views expressed are current only as of the publication date, are based on information that St. Clair Advisors believes to be accurate, and subject to change without notice. All investment decisions must be evaluated as to whether they are consistent with your investment objectives, risk tolerance and financial situation. St. Clair disclaims any liability for any direct or incidental loss incurred by applying any of the information in this publication. Indexes are unmanaged and one cannot invest directly in an index. Past performance is no guarantee of future results.
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