Everyday, Everyday I Have the Blues
By John Stoltzfus,
Chief Investment Strategist
Too Much to Lose
We expect developments in trade talks to begin in earnest as the fourth quarter gets under way
The third quarter ended with US stocks higher, foreign stocks broadly beginning to show signs of recovery from losses earlier this year, global oil higher, interest rates stateside continuing to normalize (the Fed raised its benchmark rate 25 bps last week) but not moving so dramatically higher for investors to expect the economy or the stateside equity market to fret much about it. Consider that during the last Fed hike cycle (between the end of June 2004 and end of June 2007 the Fed raised its target band 17 times in a two-year period. This cycle the Fed has moved just eight times in 2.75 years. The US economic expansion continues to show signs of sustainability with the latest read on US GDP an unrevised 4.2% for Q2.
The path of tariff implementation has moved from tension to skirmishes to retaliations to war-like embattlements but now appears not so likely to turn into a protracted trade war. Damage to the world economy seems likely to be contained the sooner talks lead to regional and country-specific resolutions of trade issues.
Ironically the global economy last year was showing evidence that it was gathering positive momentum in many parts of the world across geographic regions notwithstanding geopolitical risks. Much of the markets’ worries in the third quarter of this year centered on the escalation of tariff implementation by the US and retaliatory tariffs by China.
Recent signs of progress crossing the tape over the weekend on NAFTA, Korea and Europe—even if somewhat haltingly—point the way ahead toward resolution, leading us to expect North America, Europe and parts of Asia to get their issues resolved sooner than later and perhaps even before the stateside midterm elections.
A trade agreement between China and the US in our view is likely to be an after-theelection deal (possibly before year end or in the first quarter). Embracing the negative value of a protracted trade war appears simply too costly to all involved. At some point the rhetoric from all sides should give way to cooler heads.
“It’s not so much that things are so good but rather that they are a heck of a lot better than they were when one looks back to the crisis of 2008 and the years that followed.”
While some countries might fare better in a trade war than others none would likely prove victorious in a long, draggedout trade war. History has shown the futility and the danger of such entanglements.
Besides that, all leaders involved—no matter how powerful or prideful—have constituencies that they will have to answer to should they allow what has been a post crisis economic recovery internationally and a sustainable economic expansion stateside to fail and risk having the world’s economies fall into recession or stagnation.
It’s not so much that things are so good but rather that they are a heck of a lot better than they were when one looks back to the crisis of 2008 and the years that followed.
US equity market continued to outperform major foreign markets
Stocks stateside advanced in the third quarter with the Dow Jones Industrial Average, the S&P 500, the S&P 400 (mid– caps), the Russell 2000 (small caps) and the NASDAQ Composite (some 40% weighted in technology or tech related names) respectively up 9%, 7.2%, 3.5%, 3.3% and 7.1% in the three-month period.
On a year-to-date basis through the end of the third quarter, the Dow Jones Industrial Average, the S&P 500, the S&P 400, the Russell 2000 and the NASDAQ Composite stood respectively higher 7.0%, 9.0%, 6.3%, 10.5% and 16.6%.
International stocks did not fare nearly as well in the third quarter as US stocks did with the MSCI EAFE index (developed international markets ex-US and Canada), the MSCI Emerging Markets index, and the MSCI All World Ex-US index posting modest to essentially flat results of: 1.8%, 0.1% and 1.4%. The MSCI Frontier Markets fell 3.1% in the same period. Mixed economic results abroad, the effects of a strong US dollar on dollar-denominated debt issued by foreign issuers, and the risk of a protracted trade war is being priced into many foreign markets dependent on exports for much of their economic growth—all this played a role in holding foreign markets back in the quarter.
On a year to-to-date basis the MSCI EAFE index (developed international markets ex-US and Canada), the MSCI Emerging Markets, the MSCI Frontier Markets and the MSCI All World Ex-US index posted respective losses of: 3.8%, 9.5%, 15.3% and 5.25%.
We expect that a resolution of trade issues will have a significant and positive impact on foreign markets. Last week’s trade agreement between South Korea and the US along with news in the press over the weekend of a possible breakthrough in negotiations that will allow Canada to join the US and Mexico in a new North American agreement could give cause for some foreign markets to rally this week.
S&P Sectors Change Leaders
From a stateside perspective the S&P 500 sector performance on a year to date and third quarter basis saw some changes in leadership based on a number of factors ranging from changes in the composition of several sectors within the S&P 500 as well as market factors including valuations, profit taking, rotation and rebalancing.
On a year to date basis through the end of the third quarter the top five sectors of the S&P 500 (itself up 9%) were: information technology (up 19.5%), consumer discretionary (up 19.5%), health care (up 15.2%), energy (up 5.2%) and industrials (up 3.3%). (See page 5 for a complete chart of the performance for all the S&P 500’s sectors in the period).
With the S&P 500 up 7.2% in the third quarter the top five performing sectors were: health care (up 14%), industrials (up 9.5%), information technology (up 8.5%), communications services (up 8.4%) and consumer discretionary (up 7.8%).
Investors can expect the market to provide greater clarity as to how it will value the relationships among the sectors since the addition to the newly renamed communication services sector (formerly “telecoms”) of a number of companies from information technology and consumer discretionary.
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