2019Q3 Lookback
As we break into the last quarter of 2019, it is natural to look back at what the markets have done this year so far. Following a volatile downturn in the last quarter of 2018, where the major U.S. stock market benchmarks lost 11-18% of their value, U.S. stock markets have seen a large rebound. As of 9/30/2019, the major indices performed as followed YTD:
This image was taken from Charles Schwab.1
In late 2018, the Fed raised the federal funds rate 25 basis points to a range of 2.25-2.5%.2 This was the fourth raise of 2018. Simultaneously, the Trump administration continued to lead in a tit-for-tat trade war with China, with both sides using tariffs as their core ammo thus far. These two factors hurt business sentiment and financial expectations, because non-fixed borrowing costs would likely increase from the federal funds rate increase, tariff affected imports would be more expensive, and demand would be more uncertain (especially internationally).
Since the fourth quarter of 2018, the Federal Reserve has reacted to some deteriorating economic gauges (and potentially some increasing calls for action from Trump) by cutting the target rate range of 2.25-2.5% twice, once in August and once in September, to a range of 1.75-2%.2 Currently markets are giving “about a 87% chance of a quarter-point rate reduction at the Oct.29-30 meeting.” 3 This would mark the third consecutive rate cut. The expectation around this reference rate is that the lower borrowing costs enable investment and expansion projects, in turn boosting the economy and elongating the bull market’s life.
Data used for this image was obtained from the website of the National Bureau of Economic Research4
Using data from the National Bureau of Economic Research, I created the chart below that showcases U.S. business cycle expansion and contraction throughout recent history. Given, “The determination that the last expansion began in June 2009 is the most recent decision of the Business Cycle Dating Committee of the National Bureau of Economic Research”4, the current expansion completed its 123rd month in September. The current expansion is over two times the size of the average expansion seen since the Great Depression, and over three times the average expansion size of all expansions on record.
Data used for this image was obtained from the website of the National Bureau of Economic Research4
Seasonally adjusted real GDP has increased 21% since the pre-Great Recession high. Annualized growth has ranged between 1-4% since the recovery from the Great Recession.
The Data used for these images was obtained from the website of the National Bureau of Economic Research4
The employment front has been a bit more of a mixed bag than GDP growth has been. On the positive side, the unemployment rate reported by the Bureau of Labor Statistics on Friday October 4, 2019 came in at 3.5%. “The last time the rate was this low was in December 1969, when it also was 3.5 percent”5
Data used for this image was obtained from the website of the National Bureau of Economic Research4
While the unemployment rate is quite low, the labor force participation rate has only recovered slightly since the negative impact seen from the Great Recession. The latest reading by the Bureau of Labor Statistics stated the participation rate held steady from the August reading, coming in at 63.2% in September (up 0.6% from a year earlier).5
Data used for this image was obtained from the website of the National Bureau of Economic Research4
The counteracting readings of a beneficial low unemployment rate and a depressed labor force participation rate have led to a slow and small increase in the real median household income. From 1984 to 2018, real median household income rose 22% in the U.S., over the same period real GDP increased 142%.
Data used for this image was obtained from the website of the National Bureau of Economic Research4
The U.S. economy has been in the expansion phase of the business cycle for quite some time. The current expansion is the longest in terms of months on record. Since June 2009, the post-Great Recession average real GDP annual growth rate has been 2.2%. If GDP growth were to continue at that rate moving forward then it would outpace expected inflation, which has been trending down.
Data used for this image was obtained from the website of the National Bureau of Economic Research4
Meanwhile on the international front, the revised NAFTA agreement called “USMCA” has yet to be signed by all parties. The U.S. and Chinese trade tensions persist. The new BREXIT date is set for October 31st, with no U.K.-EU deal being agreed to yet. Furthermore, an investigation into the possible impeachment of President Trump made headlines across the globe.
In the fixed income markets, turbulence has increased as of late as more professionals begin to sound the alarms that a recession is ever closer to reality. The inversion of the yield curve has been one of the more credible indicators for recessions in the past (as the chart from Fidelity below showcases).
This image was obtained from the website of Fidelity Investments6
As we enter the last quarter of the 2019 fiscal year, signals appear mixed in the short term. There is some slack in the labor force participation market, so job growth from business expansion derived from lower borrowing costs is feasible. However, the longevity of this expansion, in addition to the recent inversion of the yield curve, the international trade tensions, and the increasing political uncertainty arising not only in the U.S. but also around the world should cause investors to pause and tread carefully.
Keep your long-term goals and portfolio allocation strategy in tandem.
- https://www.schwab.com/public/schwab/client_home
- https://www.federalreserve.gov/monetarypolicy/openmarket.htm
- https://www.bloomberg.com/news/articles/2019-10-02/slumping-data-may-force-poker-faced-powell-to-move-to-third-cut
- https://www.nber.org/cycles/cyclesmain.html
- https://stats.bls.gov/news.release/empsit.nr0.htm
- https://www.fidelity.com/viewpoints/investing-ideas/inverted-yield-curve
