September 30th, 2019 Market Recap

Executive Summary

  • Downside risks from the U.S. and China trade discussions resulted in deteriorating macro-economic conditions and corporate earnings in 2019. As a result, the U.S. Federal Reserve has lowered interest rates twice in the past three months. Moreover, the U.S. Federal Reserve has indicated it is open to cutting interest rates further in order to additionally stimulate growth and sustain the current economic expansion.
  • Despite the aforementioned economic conditions, the S&P 500 Index has produced a total return of 20.55% thus far in 2019. As we have indicated in previous commentaries, the current year-to-date index returns in the U.S. are unlikely to continue at this rate.
  • We continue to advocate a globally diversified portfolio across stocks and bonds. Moreover, we strongly believe sticking with a long-term investing plan will increase the probability of accomplishing one’s financial goals.

U.S. Federal Reserve

  • At the September U.S. Federal Reserve meeting, Chairman Jerome Powell, delivered a 25bps interest rate cut. He cited weaker investment and net trade combined with a strong labor market and consumer spending.
  • Seven policymakers on the Committee see one more 25bps rate cut before year-end in their base case. On the other hand, five FOMC participants placed their dot at 2.125% on the September dot plot, which is 25bps above the current level of the federal funds rate.
  • In our view, the Federal Reserve is reacting to a weaker global growth environment, rising uncertainty about trade policy, and negative sentiment about the global economic outlook.

Yield Curve

  • In the past several commentaries, we highlighted the extent to which an inverted U.S. yield curve has historically coincided with an economic recession in the U.S.
  • As a reminder, a negative yield curve historically implies investors expect future short-term rates to be lower as the Federal Reserve eases policy in response to a potential recession. In fact, according to J.P. Morgan Research, 7 out of the 8 U.S. yield curve inversions since 1960 were followed by a recession.
  • In August, the spread between the 2-year vs. 10-year maturity briefly turned negative. It is no longer negative (inverted) and currently stands at 8.94bps as of September 30, 2019.
  • Keep in mind that an inverted yield curve does not mean a recession is imminent. According to J.P. Morgan Research, the number of months between the 2-year vs. 10-year inversion, and the subsequent recession has increased (17 months) for the prior 3 yield curve inversions compared to the prior 4 inversions (9 months). Moreover, J.P. Morgan’s Research group notes that there was a 22-month lag between the time the yield curve inverted in 2008 and the subsequent recession.
  • The NY Federal Reserve Bank maintains a Recession Probability Index for the next 12 months ahead. As of September 30, 2019, the NY Federal Reserve’s Recession Probability Index for 2020 stands at 37.93% and is at its highest level since the Great Financial Crisis of 2008 (see chart below).


  • Trade uncertainty still remains. Lingering uncertainty will continue to provide an overhang on the global economic outlook. This uncertainty has resulted in weaker global growth and corporate earnings in 2019 and is likely to continue until a meaningful resolution is met.

Economic Data, Valuations, and Portfolio Construction

  • The ISM Manufacturing Purchase Managers Index, which is a measure of economic health for the manufacturing and service sector in the U.S., has been sharply declining in recent months (see chart below). A slowdown in the global economy resulting from elevated trade tensions has been the key driver behind the weakness in manufacturing data.
  • The U.S. economy isn’t immune to the global growth slowdown or trade uncertainty. The Atlanta Fed GDPNow Forecast Model is 1.78% as of September 30, 2019.
  • Morgan Stanley’s Business Conditions Index remains in contractionary territory but rebounded this month. As of September, it stands at 45 (50 and above indicates an expansion) which was a healthy recovery from its August reading of 17.

International Equities

  • Despite the declining economic conditions and weaker corporate profits, International Developed and Emerging Markets equities have posted positive returns year-to-date. As of September 30, 2019, the Euro STOXX 50 Index (Europe) rose by 23.55% (in Euro terms), the Shanghai Stock Exchange Composite Index (China) increased by 19.32% (in CNY terms), the Nikkei 225 Index (Japan) climbed 10.76% (in Japanese Yen terms), and the MSCI Emerging Markets Index was up 6.48% (in USD terms).
  • The Bloomberg Dollar Spot Index (BBDXY) increased by 1.72% year-to-date. We continue to believe international equities remain attractive for long term investors as they are trading at a notable valuation discount compared to the U.S. stock market.
  • According to, the iShares MSCI ACWI ex U.S. ETF (ACWX) currently has a P/E ratio of 14.07x based on 2019 analyst estimates. This is significantly lower than the SPDR S&P 500 ETF (SPY) which has a P/E ratio of 18.07x based on 2019 analyst estimates.

Fixed Income

  • U.S. interest rates have declined across various maturities in 2019. Yields on the 2-year, 10-year, and 30-year U.S. Treasury Bonds were 1.62%, 1.66%, and 2.11% respectively as of September 30, 2019. Given that the U.S. yield curve is relatively flat, investors who purchase long-term bonds are not compensated with a commensurate yield for the amount of risk being taken .
  • The Bloomberg Barclays U.S. Aggregate Bond Index is up 8.52% on a total return basis as of September 30, 2019. In the face of weaker economic conditions, we continue to prefer owning higher-quality U.S. bonds across our ETF portfolios. We maintain an overweight position in U.S. municipal bonds and U.S. mortgage-backed securities, both of which are highly rated. In fact, over 75% of our fixed-income bonds are rated either AAA or AA.

Market Timing

  • Clearly, as evidenced above, several key indicators are themselves in contradiction. Our long-standing view is that timing the market top and bottom is simply not possible, and that investors are incentivized to stay fully invested. The past year has proven to reinforce this view. The S&P 500 Index declined 13.52% in the 4th quarter of 2018 and has rallied 20.55% in 2019. We continue to advocate not only to stay fully invested, but to maintain a globally diversified portfolio of stocks and bonds.

We look forward to your feedback on this revised market review. Please reach out to us with any input as we continue to strive to provide our clients and our community relevant and useful insights.