Market Commentary – Stocks Held Firm in Q3 Despite Increased Global Concerns

The lyrics to Billy Joel’s hit, “We Didn’t Start the Fire” lists more than 100 headline events between 1949, the year of Joel's birth, and 1989, the year the record was released.  What was unique about this song was that the lyrics were nothing more than a rapid-fire succession of single-word references to the top people and events of that period.  If Joel was writing a song about today’s financial markets that list would include words like U.S.-China trade war, yield curve inversion, central bank money printing, global manufacturing recession, contraction in global profits, Trump impeachment inquiry, Saudi oil attack, value vs. growth investing, as well as a difficult IPO market for profitless, “unicorn” companies, not to mention many more…  Essentially, the third quarter ended with pretty much the same issues that have plagued the markets all year with U.S. politics (impeachment) and terrorism (Saudi oil attack) adding a couple new worries.  As a result, stocks were nearly flat last quarter but still posted their best nine months since 1997.  But those 2019 gains come on the tail of a 14% drop in the fourth quarter of 2018. Over the past 12 months, the index is up a mere 1.8%.  The question remains, will we see a repeat of last year’s fourth quarter? 

U.S./China trade talks are officially scheduled for October 10th and 11th and rhetoric from both sides remains positive ahead of the event.  At this point, the markets are hoping for a U.S./China trade truce.  And that “hope” is based on the idea that a lasting trade truce (so different than the past two we’ve had) will reduce pressure on the U.S. and global manufacturing sectors and, combined with coordinated global easing (i.e. rate cuts from the ECB, PBOC, Fed, etc.) will cause a 2016-style reflation, and an extension of the economic expansion. 

Trade uncertainty, however, may be with us even if a “trade truce” is announced this month.  Numerous trade issues remain (i.e. intellectual property rights and auto tariffs) and those issues have essentially paralyzed many CEO’s investment plans.  Business investment continues to decline on a quarterly basis.  Put bluntly, if I were running an industrial company that relied on outsourced inputs of finished products, there is absolutely no way I am increasing expenses right now unless we get a full, clear and final U.S.-China trade deal that includes the immediate, or near immediate, rollback of tariffs. And even then, I’d probably wait a few months to invest, given the multiple false truces we’ve had over the past 12 months.  Left field headlines, like last Friday’s announcement that the administration was seeking to limit U.S. investments in China, would only harden that hesitation by businesses and increase the chances they “get lean” by reducing costs. If that cost reduction spreads to employment, then fears about a future U.S. and global economic slowdown (which we’ve been seeing in the bond market all year) will be realized.  As it stands today, most global manufacturing surveys are showing contraction in the sector.

Bottom Line:  Fears of businesses reducing spending and taking less risk are legitimate, and they are a real risk to future economic growth, especially if they lead to eventual layoffs that hurt consumer spending. 

Hold the IPO…  Last month's IPO skepticism seems to have reached a turning point as WeWork officially shelved its plans to go public for the foreseeable future today. Its newly appointed co-CEOs said that they intend to focus on the core business, and hopefully give investors more confidence in WeWork’s path to profitability before attempting to go public again. Talent agency Endeavor Group postponed its offering last week as well.

Markets don’t stay calm forever.  September, historically, is one of the more volatile months for stocks.  Yet this past month, it was one of the calmest on record.  The S&P 500 didn’t have a single 1% daily drop, and only twice did it have a 1% daily gain.  Does this mean that we could have a roller coaster October?  Stay tuned…

Wealth Management – Interesting Tidbits from Around the World of Finance

Final Quarter of the Year…Over the last 25 years (1994-2018), the S&P 500 stock index has gained an average of +4.3% (total return) over the final three months of the year (October-November-December). 19 of the last 25 fourth quarters (76%) have produced a positive total return gain. (source: BTN Research).

No Shutdown…The House (on 9/19/19) and the Senate (on 9/26/19) each passed a “continuing resolution” to keep the government open through 11/21/19 instead of shutting down at midnight on 9/30/19, the final day of fiscal year 2019. The action prevents our fourth shutdown in just the last two years (source: Congress).

Show me the money…The maximum Social Security benefit paid to a worker retiring at full retirement age in 2019 was $2,861 per month, more than triple the $899 per month paid 30 years ago in 1989 (source: Social Security).

Union Workers... Only six percent of private sector workers belong to a union, compared to 37% of public sector workers. Overall, 13% of US workers, i.e., one out of every eight, belong to a union (source: Gallup).  Hopefully, GM and the UAW will come to a contract settlement soon.

Daunting Numbers…The Congressional Budget Office estimated that over the next 10 fiscal years (2020- 2029), the US government will take in $45.6 trillion of tax receipts versus $57.8 trillion of outlays, resulting in a $12.2 trillion deficit, or an average annual deficit of $1.22 trillion. The United States has produced annual deficits of at least $1.22 trillion just three times in our nation’s history – 2009-2010- 2011 (source: CBO).

Prognosticating is a Fool’s Game…As of 12/17/18, 10 Wall Street strategists predicted where the yield on the 10-year T-note would be as of 12/31/19. All 10 forecasted an increase in the 10-year note yield from its actual 12/31/18 yield close of 2.68%. However, the yield on the 10-year note has fallen to 1.675% as of Monday’s close 9/30/19 (source: Barron’s).

Quarterly Thought – Perspective

“It’s good to have money and the things that money can buy, but it’s good, too, to check up once in a while and make sure you haven’t lost the things that money can’t buy.”  

…George Horace Lorimer

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