Quarter 3 2019 Market Update

Helping families manage, preserve, and distribute wealth since 1975.

October 14, 2019

By Eric W. Hilliard

CERTIFIED FINANCIAL PLANNER ™

Branch Manager

As we say goodbye to summer and hello to fall (although it really has not felt like fall yet, has it?) let us review where things are as we enter the fourth quarter of 2019.

Third quarter market action summary

The S&P 500 began July at 2964 and throughout the month rose to a new closing high of 3025. A study by Ned Davis Research found that the S&P 500 on average experiences 3 drawdowns of 5% or more per year. According to Day Hagen Asset Management, using intraday prices we have already experienced three drawdowns of 5% or greater during 2019: a -7.9% decline May/June, a -7% decline in July/August and -5.7% during September/October.

Before we get on to the primary factors that impacted markets the past three months, please take a moment to review returns of various blended benchmarks and equity and fixed income markets over the past month, year-to-date and the past 12 months.

Returns as of 9/30/19 ___________________________________________________________________

Returns provided by Morningstar as of 9/30/19.                                                                                                              

Primary market-moving themes have remained largely the same from the second quarter to the third, but it is time to add a third factor that began having some sway and will continue to do so moving forward:

1. The Federal Reserve and interest rates (tailwind): As expected, the Fed did lower rates during the third quarter In fact, they did so twice, by 25 basis points (.25%) each time, first on July 31^st and again, September 18^th. Don’t fight the Fed is a mantra we keep in mind when evaluating markets. An accommodative Federal Reserve, meaning rates are generally low, is a tailwind for the stock market.
2. Trade Disputes and the resulting uncertainty (headwind): For over a year, every time tensions flare up between the U.S. and China markets pull back (sometimes sharply). Every time someone from Washington or China comments on possible progress or willingness to compromise markets quickly recover their losses and rally. This is largely what has limited market gains over the course of the past year. Tensions have grown less-bad recently and that has helped (headwind lessened). The continued uncertainty has negatively impacted some economic data, so there is concern about how much of a drag it will continue to be on economic growth. There is a lot of speculation on how this may play out as the 2020 Presidential election draws nearer and we will be watching to see how it unfolds.
3. 2020 Elections (turbulence): Speaking of the 2020 election - numerous Democratic candidates are fighting for attention-grabbing headlines, much like what happened between Republican candidates leading up to the 2016 election. Certain businesses are under attack by some candidates and as more attention is given to these candidates and we grow closer to the elections this will likely continue to cause some volatility for areas of the market. For now, this is all noise, but we will be paying attention.

How scary is October, really?

October is known for a few really severe pullbacks (1929, 1987 and 2008). However, according to Moneychimp.com we found some interesting data about monthly performance of the S&P 500. From 1950-2018 October ranks as the seventh strongest month, so right in the middle. The S&P 500 has generated positive returns during October 41 times and negative returns 27 times during those years. Additionally, while October tends to be more volatile and the September-early October period does regularly see market pullbacks, equity markets tend to improve during the second half of October, leading to positive overall returns for the month, on average, as we head into the two strongest months of the year, November (#1) and December (#2),.

According to an October 2, 2019 note from AdvisorAnalyst.com October has experienced positive returns during a pre-election year every year since 1999, with an impressive average return of 6.5%. So, we may experience some spooky days, but history does not support October being a terribly scary month. We prefer to focus on the pumpkins, chrysanthemums, Halloween festivities, cool weather (it’s seems to finally be arriving!), changing leaf colors and football games that characterize this lovely time of year.

Can the stock market rally from here?

At the beginning of the third quarter our answer to that question was “For now, we believe the answer is yes, especially if the Federal Reserve lowers rates .25% in the near future”. And, on cue, the Fed did lower rates, in fact, doing so twice as mentioned above. As noted in The Chart Report from September 18^,, 2019, over the past five cycles, when the first two cuts by the Federal Reserve were 25 basis points the S&P 500 was up 9.7% six months later and 16.7% a year later.

Equity markets made sizable gains in 2017. During 2018 and 2019 so far the market has been consolidating those gains. We saw similar market action during 2014 through early 2016 after nice gains between July 2011 and early 2014. During 2014-2016 economic growth slowed somewhat and there were fears about whether a recession was coming. A similar scenario seems to be playing out. We suspect data will continue to point to an economy that is still growing, albeit slower than the past two years, and as confidence strengthens around that the market will once again break out to the upside. Markets have been resilient in the presence of challenging global news and that is a good sign.

Please check in periodically with our web page and social media sites for updates:

Facebook: https://www.facebook.com/hfgraymondjames

LinkedIn:

Eric Hilliard, CFP®, Branch Manager https://www.linkedin.com/in/ewhilliard/

Wade Stafford, CFP®, Associate Financial Advisor https://www.linkedin.com/in/ericwstafford/

Jenny Hilliard, Investment Executive: https://www.linkedin.com/in/jennyhilliardrj/

Please let us know of any significant changes in your life or situation that could impact your financial plan. In the meantime, we continue to follow the processes we have developed over the years that enable us to provide you our very best. Thank you for your trust in me and in our practice.

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Investing involves risk, and investors may incur a profit or a loss. All expressions of opinion are subject to change. Past performance is not an indication of future results and there is no assurance that any of the forecasts, statements, or opinions mentioned will occur.

DJ GLB Aggressive Index - The DJ GLB Aggressive is a total-portfolio index that allow investors to evaluate the returns on their portfolios considering the amount of risk they have taken. These profiles are defined based on incremental levels of potential risk relative to the risk of an all-stock index. It's made up of composite indices representing the three major asset classes: stocks, bonds and cash. The asset class indices are weighted differently within each relative risk index to achieve the targeted risk level. The weightings are rebalanced monthly to maintain these levels. The DJ GLB Aggressive index is 100% of All Stock Portfolio Risk.

DJ GLB Conservative Index - The DJ GLB Conservative is a total-portfolio index that allow investors to evaluate the returns on their portfolios considering the amount of risk they have taken. These profiles are defined based on incremental levels of potential risk relative to the risk of an all-stock index. It's made up of composite indices representing the three major asset classes: stocks, bonds and cash. The asset class indices are weighted differently within each relative risk index to achieve the targeted risk level. The weightings are rebalanced monthly to maintain these levels. The DJ GLB Conservative index is 20% of All Stock Portfolio Risk.

DJ GLB Moderate Aggressive Index - The DJ GLB Moderate Aggressive is a total-portfolio index that allow investors to evaluate the returns on their portfolios considering the amount of risk they have taken. These profiles are defined based on incremental levels of potential risk relative to the risk of an all-stock index. It's made up of composite indices representing the three major asset classes: stocks, bonds and cash. The asset class indices are weighted differently within each relative risk index to achieve the targeted risk level. The weightings are rebalanced monthly to maintain these levels. The DJ GLB Moderate Aggressive index is 80% of All Stock Portfolio Risk.

DJ GLB Moderate Conservative Index - The DJ GLB Moderate Conservative is a total-portfolio index that allow investors to evaluate the returns on their portfolios considering the amount of risk they have taken. These profiles are defined based on incremental levels of potential risk relative to the risk of an all-stock index. It's made up of composite indices representing the three major asset classes: stocks, bonds and cash. The asset class indices are weighted differently within each relative risk index to achieve the targeted risk level. The weightings are rebalanced monthly to maintain these levels. The DJ GLB Moderate Conservative index is 40% of All Stock Portfolio Risk.

DJ GLB Moderate Index - The DJ GLB Moderate is a total-portfolio index that allow investors to evaluate the returns on their portfolios considering the amount of risk they have taken. These profiles are defined based on incremental levels of potential risk relative to the risk of an all-stock index. It's made up of composite indices representing the three major asset classes: stocks, bonds and cash. The asset class indices are weighted differently within each relative risk index to achieve the targeted risk level. The weightings are rebalanced monthly to maintain these levels. The DJ GLB Moderate index is 60% of All Stock Portfolio Risk.

The Dow Jones Industrial Average is an unmanaged index of 30 widely held stocks. The S&P 500 is an unmanaged index of 500 widely held stocks. The MSCI EAFE (Europe, Australia, Far East) index is an unmanaged index that is generally considered representative of the international stock market. MSCI Emerging Markets Index is designed to measure equity market performance in 23 emerging market countries. The index’s three largest industries are materials, energy and banks. The Russell 2000 is an unmanaged index of small cap securities. The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market. The Bloomberg Barclays U.S. Corporate High Yield Bond Index is composed of fixed-rate, publicly issued, non-investment grade debt, is unmanaged, with dividends reinvested and is not available for purchase. The index includes both corporate and non-corporate sectors. The corporate sectors are Industrial, Utility and Finance which include both U.S. and non-U.S. corporations. An investment cannot be made in these indexes. International investing involves additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets. The performance noted does not include fees or charges, which would reduce an investor's returns. Asset allocation and diversification do not guarantee a profit nor protect against a loss. Any Opinions are those of Eric and Jenny Hilliard and are not necessarily those of RJFS or Raymond James.

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