Investment Committee and Investment Advisory Department Report, 2019 Volume Four

Markets Resilient For Third Straight Quarter

The steady gains of early 2019 are more variable now.

U.S.-China trade war uncertainty, and a lack of clarity on interest rate policy, caused a sharp increase in volatility mid-quarter. Even so, the S&P 500 remained resilient and finished close to the all-time highs of late July.

3rd Quarter Performance Review

Markets showed impressive resilience in the final month of the quarter.

The U.S.-China trade truce in late June didn’t last. President Trump announced new 10% tariffs on $300 billion worth of Chinese imports on August 1st, citing a failure by the Chinese to fulfill promises to increase purchases of U.S. agricultural products. China retaliated with new tariffs on $75 billion of U.S. imports, and President Trump immediately responded by increasing tariffs on all $550 billion of Chinese imports. The tariff tit-for-tat weighed on markets throughout August.

U.S. monetary policy uncertainty also pressured stocks during August. The Federal Reserve cut interest rates by 25 basis points on July 31st, but did not definitively signal that more rate cuts were coming. Disappointment from that lack of guidance, combined with growing worries about economic growth, added to August market volatility.

Finally, a closely-watched part of the U.S. Treasury yield curve, the “2-10 Spread,” inverted—yields on shorter-term notes exceeded those of longer-term notes—for the first time since 2007. This anomaly has historically preceded a recession by an average of 18 months, but is not a perfect indicator. Regardless, seeing this signal for the first time in over a decade weighed on investor sentiment and added to August volatility.

Despite this trifecta of headwinds, markets showed impressive resilience in the final month of the quarter, just as they had in July.

4th Quarter Market Outlook

Uncertainty continues to weigh on markets, but there is also room for optimism.

The S&P 500 successfully weathered increased volatility in Q3 due to positive current economic fundamentals, interest rate cuts, better-than-expected corporate earnings and renewed hope for resolution on U.S.-China trade.

However, the volatility experienced in May of this year, and again in August, is an important reminder that while markets remain broadly resilient, risks to the economy and investment portfolios need to be carefully monitored. Investors face multiple unknowns as we begin the final three months of 2019.

First, the ongoing U.S.-China trade war is presently the most important influence on markets. While there has been rising optimism for some sort of temporary resolution, the fact remains that the U.S. and China still have substantial tariffs in place on imports, with more potentially coming in December. Those tariffs are a continuing headwind on global economic growth, and slowing global growth is a risk to markets. We will continue to watch closely.

The economic outlook remains somewhat uncertain. The U.S. economy continues to grow, although at a slower pace, and is the envy of the world’s developed economies. Accommodative policy by the Federal Reserve will continue to support that trend. However, Fed rate cuts don’t bring guarantees of sustained periods of economic growth, and the ongoing U.S.-China trade war, paired with the reappearance of some concerning indicators such as an inverted yield curve, call for continued vigilance.

Domestic and geopolitical headlines may continue to drive short-term market noise and shift attention away from fundamentals. The U.S. presidential impeachment inquiry has the potential to weigh on investor sentiment. Internationally, U.S.-Iran tensions are as high as they’ve been in years. Any conflict between the U.S. and Iran will likely be a negative for stocks, broadly speaking.

Markets always face uncertainties at the start of a new quarter, and we are committed to monitoring these situations and their impact on the markets and your portfolio. Despite the media’s tendency to focus on negative or shocking events, current corporate and economic fundamentals are satisfactory, and it is those factors that determine the longer-term path of markets.

At Krilogy, we understand that volatility, regardless of the cause, can be unnerving even if it is historically typical. We remain committed to helping you navigate this ever-changing market environment, with a focused eye on ensuring we continue to make progress on achieving your long-term investment goals.

Our years of experience in all types of markets have taught us that successful investing remains a marathon, not a sprint. Therefore, it remains critical to stay invested, remain patient, and stick to the plan. That’s why we’ve worked diligently with you to establish a personal allocation target based on your financial position, risk tolerance, and investment time horizon.

Recent strong market performance notwithstanding, we remain vigilant towards risks to the economy and investment portfolios. We thank you for your ongoing confidence and trust. Rest assured that our entire team is dedicated to helping you successfully navigate this market environment.

Please do not hesitate to contact us with any questions, comments, or to schedule a review.

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