Economic & Market Outlook – Fourth Quarter 2019
Uncertainty is the word on the street these days as investors seem focused on geopolitical risks. Despite that underlying disquiet, bonds, stocks and alternative investments have all posted strong returns so far this year with the S&P 500 plus 21% and bond returns of 5-6%. This broad‐based positive performance masks the tension underneath the surface, which can explode into market‐moving trend reversals on little news. For example, recently two “winning” investment trends in 2019 experienced dramatic reversals when the relevant “story” changed:
- Interest‐rate reversal: The yield on a 10‐year US Treasury Note had followed a long and steady decline from a peak of 3.24% in September 2018 to an eye‐popping low of 1.46% in late August—only to reverse course with a 44 basis point leap back upward to 1.90% in mid‐September.
- Momentum stock reversal: At the same time, markets experienced a sharp three‐day reversal that temporarily drove momentum stocks out of favor as investors embraced value stocks instead. That short reversal closed the year-to‐date performance gap between the two styles from 12% to just 3%.
What's critical to note here is neither of these reversals was triggered by new fundamental data about companies and their economic prospects. Rather, the driving force was an easing of the geopolitical uncertainty, as investors embraced a positive outlook about U.S.‐China trade. So, what's needed now?
- Slowing economy
- Fed rate cuts and negative yields
- Early October decline in the stock market
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