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Market Commentary: Third Quarter October 16, 2019

Through the month of September, the global markets have had a strong year. Quarter 3 brought the S&P 500 Index up 1.7% for a 20.55% YTD return. Small companies represented by the Russell 2000 Index cooled off a little bit with a -2.4% for the quarter but are still up over 14% YTD. International stocks represented by the iShares MSCI EAFE Index declined -1.07% and are up 12.8% YTD. The Federal Reserve reduced the Federal Funds Rate which helped bond prices. The Barclays US Gov/Credit 1-5 Year Index was up 0.89% for the quarter, and 4.48% YTD.

Along with the cooler weather, October brings major league baseball playoffs, hunting season, and… stock market crashes? Historically, October is NOT the worst month of the year for investing (it is September), but the stock market crash of Black Tuesday in 1929, the crash of 1987, and 2008 Great Recession all happened in October. Rumors of recession have been circling in the media, initiated by the inversion of the yield curve.

The yield curve is a graph that depicts the interest rate (or yield) for bonds over time. Usually there is a higher interest rate associated with longer maturity dates, because there is more risk the further out the maturity date goes. Bond prices are generally established by market supply and demand as the bonds trade on a daily basis. Bond prices and their yields are inversely related. In the graph below, illustrating US Treasury Yields, you can see that a year ago (the blue line) sloped up and to the right. This is a normal yield curve – the longer the maturity, the higher the interest rate. You can notice that some parts of the curve might be flatter or steeper than others, and that is set by market expectations on interest rates in the future. The gray line is the current yield curve, and the 2, 5, 7, and 10-year Treasuries have a lower interest yield than the one-year Treasury. This indicates that the collective wisdom of the markets think that interest rates will be lower in the future than they are now. 

Although inverted yield curves have proceeded recessions in the past, the timing of those recessions are not certain. For instance, it has taken up to 2 years for an actual recession (defined as GDP contracting for two successive quarters) after an inverted yield curve.

Whether or not we are headed to a recession, or if a recession will come, is very difficult to predict. Currently, increased government tariffs, political uncertainty, and slowing growth overseas may be providing economic headwinds. On the flip side, unemployment is low, interest rates are low, inflation is low, and consumption is high, indicating that the economy may continue to move full steam ahead.

At Petersen Hastings, we develop portfolio allocations that are suited to help you achieve your individual goals, both short term and long term. We know we cannot predict the future, so we incorporate the best empirical research that is available for a diversified portfolio that includes over 10,000 securities. We will rebalance those positions when they vary from their target weightings to help preserve and grow your family’s wealth.

As we approach the end of the year, if you are considering charitable gifts, ROTH IRA conversions, or have had a taxable event outside our knowledge, please talk to your advisor so we can help you prepare and/or make adjustments. We appreciate your trust in us! 

Market Commentary Q3 2019

Author: Petersen Hastings Team

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