Almost no one predicted the surprisingly strong 2019 year-to-date returns for stocks and bonds. The stock market is currently indifferent about a trade war or recession, while declining long-term bond yields indicate the bond market takes a different view. Most things investors worry about are not really important. What is important are the four “deep risks.”
October lived up to its billing as the “worst month,” with the global MSCI All-Country World Index falling 7.5%, leaving the index down 4% for the year. US stocks, which had held up amid weakness abroad, fell 6.8% in October. Bonds, which usually zig when stocks zag, also saw selling pressure as interest rates rose.
The sharp 10% correction in stocks earlier in the year seems like a distant memory. Domestic equity markets regained new highs in the third quarter as the ongoing narratives surrounding shaky emerging markets, never-ending Brexit negotiations, rising interest rates, and trade tensions failed to dent confidence.
The S&P 500 returned 3.7% while the broader MSCI All-World index gained 3.0% in July, recording the strongest gains for stock markets since January and putting the S&P within 50 points of its all-time highs. Monetary policy changes are underway and, for now at least, the economy and the markets are relatively undisturbed.