Seesaw Quarter

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Stocks shook off slowing macroeconomic growth and on-going trade tensions in September, adding a final upswing to a turbulent third quarter. Stock prices fluctuated for much of the quarter, while bonds benefited from a shift in policy from the Federal Reserve and other central banks. 

For all the gut-wrenching reversals, global stocks were flat for the third quarter. The S&P 500 managed a modest 1.7% gain, while shares of smaller US companies were down 2.5%.

Bond prices gained on a double whammy of lower expectations for interest rates and falling inflation expectations. The Fed cut rates twice in the third quarter. Bond yields dramatically reversed course across the globe as investors fretted over a slowing global economy.

Despite the choppy quarter, financial assets still boasted strong gains for the year with global stocks up 16% while bonds returned 8.5%.

There are signs the slowdown in activity is percolating into the US, which has shown resilience to a weakening global economy. Last week’s ISM report on manufacturing suggested activity in that sector has slowed to levels consistent with past recessions. But it’s easy to overstate the importance of manufacturing as our economy continues to be dominated by services, which is harder to track.

According to the Atlanta Fed, GDP is still on track for a 1.8% annual growth rate in the 3rd quarter. That’s hardly gangbusters, but not indicating the economy is contracting. Still, economic indicators are imperfect and subject to revisions. We may very well be in a recession now, but we won’t know until after the fact. The fear is that this is the next “big one,” but slowdowns come in all shapes and sizes.

Lather, Rinse, Repeat

The hyper-focus on political tensions is not helping sentiment. The UK is sinking deeper into the Brexit quagmire. The name-calling in the United States is only growing louder.

The ongoing trade war is stuck in a cycle. Hopes of a trade deal lift stocks; the deal doesn’t materialize, so stocks give back gains. The market will only leave this cycle when some other, seemingly more important, narrative grabs Wall Street’s focus.

What will drive the next market cycle? It could be more political distractions or heightened election rhetoric. It could also be a shift to fundamentals, either an improvement in the earnings outlook or signs of a further deterioration.

We all have a tendency to overstate the importance of politics when discussing the market. Part of that is due to the ease of the information being right at our fingertips. Technology has reshaped how we consume news, and it has played into our worst behavioral instincts. It has never been easier to find news that is crafted to confirm our own beliefs, spun to either make us very happy or exceptionally enraged.

What matters for investing is often harder to pinpoint. The financial markets are messy, filled with uncertainty and doubt. Economic data, company fundamentals, and investor sentiment tend to bounce from “decent” to “not good” most of the time. The financial news media provide tons of data but not much perspective.

What It All Means

It’s likely the markets will continue to be choppy, which means we should expect more swings in stocks and bonds in the fourth quarter. We never advocate for attempting to time the next major market move. But now is the time to be patient and avoid reacting to the news of the day. It always feels more significant than it is.

Don’t lose sight of the long-term, but be opportunistic. Whether you are investing new money or funding your lifestyle, your circumstances should dictate your investment strategy. Market conditions may influence how you put your money to work or find liquidity for living expenses. It’s important to anticipate cash needs and target an appropriate amount of risk for your circumstances. The markets are most unpredictable over shorter time horizons. The more you can anticipate your financial situation, the more proactive and patient you can be with your investment strategy.

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