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Core Comments Quarterly Newsletter

October 7, 2019 The bull wave continued for the S&P 500, but it slowed down significantly growing 1.7% in the third quarter taking its year to date return to 20.6%. Small US stocks, foreign developed and emerging markets stocks all fell as investors avoided riskier securities. This was a major divergence from the first half of the year when nearly everything went up. So, given this avoidance of risk, you would expect bonds to do well and the Barclays Aggregate Index did gain 2.3% for the quarter and 8.5% for the year.

You might be thinking, why the sudden shift to safer assets? Has anything changed significantly? I do not believe that there were any important surprises. Discussions surrounded interest rate policy and the trade wars impact on economic growth.

The Fed cut rates twice in the quarter taking their benchmark rate to 2%. While this is fairly significant and certainly put a tail wind behind bonds, it was certainly no surprise and had been discussed heavily since the end of 2018. The obvious implication of these cuts is that the Fed fears slowing growth, note this is not negative growth which would be recessionary. At the beginning of the year they expected GDP growth of 2.7% which has been revised downward to 2%.

In Europe where the economy appears to be in worse shape than ours, the central bank announced new rate cuts and indicated that they would resume their bond buying to support their economies. Overall global interest rate policy has been supportive of economic growth.

Declining trade has been singled out as the culprit behind slowing growth with tariffs and rising protectionism singled out as the drivers of this negative trend. Little changed on these fronts during the quarter but a couple days after the quarters end the US announced $7.5 billion in new tariffs on the EU over subsidies to Airbus which puts Boeing at a competitive disadvantage. The US and China seem to be in a stalemate situation with little apparent progress. Fixing this requires global cooperation which is in very short supply these days. This is the biggest concern in my opinion. Yet it is not clear that this will lead to a recession.

I believe that this quarters move away from risky assets is grounded in uncertainty which is the root of recessions. Recessions are a psychological change in peoples/businesses attitude about the prospects for the economy. It is also impacted by the political uncertainty of the coming election and now that is magnified by the prospect of an impeachment. Not everything is bad, we are still in a period of growth and old age is not a likely cause of recession. The unemployment rate just hit a low not seen for 50 years as employers continue to look for more employees. It seems to me that caution in the face of uncertainty seems like a wise approach.

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