Third Quarter 2019: Inversion
U.S. stocks eked out a gain in the third quarter of 2019 despite the yield curve inverting for the first time in more than a decade and continuing trade war tensions with China. After the almost 2% rise in the S&P 500 Index during the quarter, the index is up more than 20% in the first nine months of the year. The broader-based Russell 3000 Index has also risen more than 20% in 2019, so far. Even with the strong recent performance the S&P 500 sits only slightly above its fall 2018 levels. The persistent theme in the last year and a half has been fluctuating market sentiment focused on potential trade wars, slowing global growth, Brexit fallout, and more recently, continued protests in Hong Kong.
Central banks around the world have tried to ease concerns and spur growth by dropping rates, sometimes into negative territory. In Mario Draghi’s final meeting as the president of the European Central Bank, he reduced deposit rates to -0.5%, joining Sweden, Japan, and Switzerland with negative rates. Mr. Draghi also announced an open-ended bond buying program, which should continue to put downward pressure on global interest rates. The spillover from continued global easing has helped drag U.S. long-term rates lower and has pushed the dollar up to its highest level since 2017, much to President Trump’s chagrin. The strong performance of the dollar helps partially explain the relative underperformance of Non-US Equity markets since the start of this year.
The drop in rates has buoyed fixed income, with long-dated bond indices up over 20% for 2019 and 6% for the quarter. Also benefiting has been the real estate sector, with US REITs up over 25% for the calendar year-to-date.