Quarterly Market Review: Q3 2019

Cornucopia

Welcome to the fourth quarter of 2019! As I was thinking about writing this Q3 Quarterly Market Review, I was thinking of the abundance of news and moving parts in the economic and political world. In reality, there is never a time when nothing is happening. This time may feel more chaotic than others, but the market is always "climbing a wall of worry". So, in thinking about cornucopias and the abundance for which they are famed, the world today is bringing us a steady supply of fruits and vegetables in the form of low interest rates in housing and investing, good profits for U.S. companies, global trade battles, negative interest rates around the world, domestic political drama and international geopolitical intrigue. With the holidays fast approaching, and the irresistible desire to spend, give and enjoy, I thought an update on credit cards would be a timely topic. With the economy doing well and unemployment at extreme lows, people tend to feel more confident to spend and, at times, overspend. This may seem less problematic with interest rates hitting recent lows, however, not all interest rates are the same. While mortgage rates are dropping, credit card rates have actually been climbing. As of August 2019, the average interest rate charged on cards paying interest was a lofty 16.97%. Banks are looking for ways to make more money in a low interest rate world, and credit cards are one way they can do so.

Shown below: Commercial Bank Interest Rate on Credit Card Plans, Accounts Assessed Interest

Further, credit card and all consumer debt balances continue to climb, reaching $4.14 trillion dollars as of August 2019. After the Great Recession, there were a couple years of declining consumer debt balances before the dramatic resumption of borrowing as the economy improved, people returned to work, consumer confidence grew, and interest rates remained low.

Shown below: Total Consumer Credit Owned and Securitized, Outstanding

Thankfully, the economy and employment remain strong, so credit delinquency rates are fairly stable below the long-term trend.

Shown below: Delinquency Rate on Credit Card Loans, All Commercial Banks

However, interest rates of 17% make credit card balances exceedingly difficult to pay off. If you have to make a choice between paying off a credit card balance or investing money, the choice is clear – pay off the credit card! It is highly unlikely that investment returns will exceed the rates charged on credit cards. A dollar saved is a dollar earned – paying off a credit card balance costing 17% is the same thing as earning 17% on those dollars.

As we all enjoy the fall and look forward to the holiday season, let’s enjoy our family and friends, and remember what is most important in life. In the spirit of giving, be generous, but also be mindful of what you can afford. As the cornucopia represents, may your holidays be nourishing, enjoyable and abundant!

And with that, I bring you the Q3 Quarterly Market Review!

Economic Indicators at a Glance

Below you’ll find a snapshot of some top-line economic indicators, followed by the Quarterly Market Review.

Data source: Trading Economics. 2019.

Market Summary Third Quarter 2019 Index Returns

Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Market segment (index representation) as follows: US Stock Market (Russell 3000 Index), International Developed Stocks (MSCI World ex USA Index [net div.]), Emerging Markets (MSCI Emerging Markets Index [net div.]), Global Real Estate (S&P Global REIT Index [net div.]), US Bond Market (Bloomberg Barclays US Aggregate Bond Index), and Global Bond Market ex US (Bloomberg Barclays Global Aggregate ex-USD Bond Index [hedged to USD]). S&P data © 2019 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. MSCI data © MSCI 2019, all rights reserved. Bloomberg Barclays data provided by Bloomberg.

World Stock Market Performance

MSCI All Country World Index with selected headlines from Q3 2019

These headlines are not offered to explain market returns. Instead, they serve as a reminder that investors should view daily events from a long-term perspective and avoid making investment decisions based solely on the news.

It is not possible to invest directly in an index. Performance does not reflect the expenses associated with management of an actual portfolio.

Past performance is not a guarantee of future results.

World Asset Classes

Third Quarter 2019 Index Returns (%)

Looking at broad market indices, US equities outperformed non-US developed and emerging markets during the third quarter. Value stocks outperformed growth stocks in the US but underperformed in non-US and emerging markets. Small caps outperformed large caps in non-US markets but underperformed in the US and emerging markets. REIT indices outperformed equity market indices in both the US and non-US developed markets.

Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. The S&P data is provided by Standard & Poor's Index Services Group. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. MSCI data © MSCI 2018, all rights reserved. Dow Jones data © 2019 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. S&P data © 2019 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. Bloomberg Barclays data provided by Bloomberg. Treasury bills © Stocks, Bonds, Bills, and Inflation Yearbook™, Ibbotson Associates, Chicago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield).

U.S. Stocks

Third Quarter 2019 Index Returns

US equities outperformed both non-US developed and emerging markets in the third quarter. Value outperformed growth on a marketwide basis in the US. However, value underperformed growth across large cap stocks but outperformed in small caps. Small caps underperformed large caps in the US. REIT indices outperformed equity market indices.

Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Market segment (index representation) as follows: Marketwide (Russell 3000 Index), Large Cap (Russell 1000 Index), Large Cap Value (Russell 1000 Value Index), Large Cap Growth (Russell 1000 Growth Index), Small Cap (Russell 2000 Index), Small Cap Value (Russell 2000 Value Index), and Small Cap Growth (Russell 2000 Growth Index). World Market Cap represented by Russell 3000 Index, MSCI World ex USA IMI Index, and MSCI Emerging Markets IMI Index. Russell 3000 Index is used as the proxy for the US market. Frank Russell Company is source and owner of trademarks, service marks, and copyrights related to Russell Indexes. MSCI data © MSCI 2019, all rights reserved.

Real Estate Investment Trusts (REITs)

Third Quarter 2019 Index Returns

In the third quarter, US real estate investment trusts outperformed non-US REITs in US dollar terms.

Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Number of REIT stocks and total value based on the two indices. All index returns are net of withholding tax on dividends. Total value of REIT stocks represented by Dow Jones US Select REIT Index and the S&P Global ex US REIT Index. Dow Jones US Select REIT Index used as proxy for the US market, and S&P Global ex US REIT Index used as proxy for the World ex US market. Dow Jones and S&P data © 2019 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.

Select Market Performance

Third Quarter 2019 Index Returns

In US dollar terms, Belgium and Japan recorded the highest country performance in developed markets, while Hong Kong and Singapore posted the lowest returns for the third quarter. In emerging markets, Turkey and Taiwan recorded the highest country performance, while Poland and South Africa posted the lowest performance.

Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Country performance based on respective indices in the MSCI World ex US IMI Index (for developed markets), MSCI USA IMI Index (for US), and MSCI Emerging Markets IMI Index. All returns in USD and net of withholding tax on dividends. MSCI data © MSCI 2019, all rights reserved. UAE and Qatar have been reclassified as emerging markets by MSCI, effective May 2014.

Fixed Income

Third Quarter 2019 Index Returns

Interest rates in the US Treasury market decreased during the third quarter. The yield on the 5-year Treasury note declined by 21 basis points (bps), ending at 1.55%. The yield on the 10-year Treasury note decreased by 32 bps to 1.68%. The 30-year Treasury bond yield fell by 40 bps to 2.12%.

On the short end of the yield curve, the 1-month Treasury bill yield decreased to 1.91%, while the 1-year Treasury bill yield decreased by 17 bps to 1.75%. The 2-year Treasury note yield finished at 1.63% after a decrease of 12 bps.

In terms of total returns, short-term corporate bonds gained 1.17%. Intermediate-term corporate bonds had a total return of 1.74%.

The total return for short-term municipal bonds was 0.33%, while intermediate-term munis returned 1.02%. Revenue bonds outperformed general obligation bonds.

One basis point equals 0.01%. Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Yield curve data from Federal Reserve. State and local bonds are from the S&P National AMT-Free Municipal Bond Index. AAA-AA Corporates represent the ICE BofAML US Corporates, AA-AAA rated. A-BBB Corporates represent the ICE BofAML US Corporates, BBB-A rated. Bloomberg Barclays data provided by Bloomberg. US long-term bonds, bills, inflation, and fixed income factor data © Stocks, Bonds, Bills, and Inflation (SBBI) Yearbook™, Ibbotson Associates, Chicago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield). FTSE fixed income indices © 2019 FTSE Fixed Income LLC, all rights reserved. ICE BofAML index data © 2019 ICE Data Indices, LLC. S&P data © 2019 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.

This report was prepared by Gregory Saliba.