The third quarter brought mixed results for global capital markets. Most domestic large cap indices posted modest gains, while domestic small cap and international markets posted losses. Fixed income returns increased for the quarter as interest rates continued their decline. The economic backdrop included a US economy that continued to hum along, while global growth slowed. Central banks around the world tried to spur growth with monetary easing. However, despite the third quarter’s mixed results, most areas of the broad market (both equity and fixed income) remain positive on the year.
US Economy and Markets
The US economy continued to perform reasonably well in the third quarter. The consumer continues to be a bright spot with consumer confidence at elevated levels and unemployment still low. However, some of the momentum may be waning as the pace of growth and hiring seems to be slowing and consumer confidence has retreated a bit. GDP growth was 2% for the second quarter (annualized) and 2.3% year-over-year. Inflation continues to remain stubbornly low, as monetary stimulus has not spurred price increases.
Worries over the impact of tariffs and concern about growth overseas led the Federal Reserve (Fed) to cut the Federal Funds rate by 0.25% at its September meeting. Following the interest rate cut in July, this marks the second rate cut for the year. Commentary around the rate cut cited it as being a mid-cycle adjustment, but Fed Chair Jerome Powell also recently said that it is his objective to sustain the economic expansion. Federal Reserve forecasts do not include another rate cut in 2019 or 2020, but market expectations are mixed.
Non-US Economies and Markets
Throughout the quarter, investors remained focused on below-average economic growth overseas. GDP growth across the euro zone grew 1.2% in the second quarter (annualized). Several countries such as Germany, Japan and China revised growth estimates downward. Similar to the US, central banks around the world responded by cutting interest rates during the quarter. The European Central Bank also announced a new bond purchase program beginning in November, reinforcing its commitment to spur growth and achieve its inflation target.
The manufacturing sector continues to post disappointing results against the backdrop of trade talks between the US and China. Both countries threatened and imposed additional tariffs on one another in the third quarter. The two countries agreed to a 13th round of trade talks in October, somewhat easing concerns going into the end of the quarter.
In the United Kingdom (UK), the seemingly never-ending Brexit uncertainty continues, clouding the outlook in both the UK and the euro zone. After repeatedly kicking the can down the road, the October 31st deadline for a Brexit deal is rapidly approaching. The market seems to be pricing in the likelihood of the UK leaving the European Union without a formal deal, but time will tell what the ultimate outcome will be.
What Does This Mean for You?
Against a backdrop of slowing economic growth, returns were subdued during the third quarter, but remain solidly positive on a year-to-date basis. Global headwinds still exist, such as uncertainty surrounding trade negotiations, an imminent Brexit, and political headlines in the US. While there appears to be ample fuel for lower expectations going forward, we continue to encourage a long-term perspective and appropriate diversification. We encourage investors to adhere to a disciplined process that includes an asset allocation closely aligned with your financial goals. If you have any questions or would like to meet and review your financial situation, please call our office for an appointment.
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