WESCAP Group Q3 2019 Commentary
Early August saw the U.S./China trade war rhetoric ramp up. This resulted in stocks going down and a flight to quality into Treasury bonds. In turn, this forced Treasury yields down and resulted in a yield curve inversion, an unusual condition in which longer term yields are lower than shorter term yields, which has often preceded recessions. Later in August and September, the U.S. relented modestly on some pending onerous trade restrictions allowing markets to recover and for yields to rise modestly, also reducing fears of a recession.
Uncertainty over trade policy and global growth, and political uncertainty in the U.S., China/Hong Kong and the U.K. was a perfect recipe for whipsaw volatility across the world, resulting in sharp, but short downward and upward price swings in stocks and credit-sensitive bonds. The best strategy was not to join the fearful throng, but retain composure and ride it out.
All of these price swings ended up being much ado about nearly nothing by the end of the quarter. U.S. stocks (S&P 500) returned 1.7% for the third quarter. The Russell 2000 (small cap stocks) declined 2.4%. Developed foreign markets (EAFE index) lost 1.1% over the quarter though the currency-hedged EAFE index gained 2.3%, once again showing the recent benefit of currency hedging in a strong-dollar environment. The China-heavy emerging markets stock index (MSCI EM) lost 4.3%.
High-yield bonds returned 1.3% over the quarter. Treasury securities had quarterly returns from 0.5% (1-3 mo. T-bills) to 8.2% (20+ Years). Gold went up 3.8%, though the general commodity index (GSCI) declined 4.2% over the quarter. As a result of such mixed asset class results, most globally diversified portfolios showed either minor gains or minor losses for the third quarter.
Current economic and corporate earnings growth are showing signs of further deceleration. As mentioned last quarter, most short-term economic decelerations do not turn into recessions. However, during periods of slowing economic growth, we should expect further price gyrations in “risk” assets. This is likely to continue until we have a reduction in trade tensions or until additional global stimulus measures are taken.
Given the very low interest rates available on CDs and short-term bonds, favored investments over the next 12 months continue to be stocks and credit-sensitive bonds. For those who are more sensitive to short-term volatility, now is a good time to review your portfolio and the risk/return trade-offs inherent with different asset allocations.
Note that the recent decline in interest rates makes this an attractive time to refinance fixed-rate loans whether it be for your residence, investments or for personal purposes. As always, please feel free to contact a WESCAP advisor if you would like to discuss any of this further.