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Q3 Market Recap: Stocks Hold Their Own Despite Economic Slowdown Concerns

The third quarter was marked by tariff disputes, a slowing global economy, stock market volatility, and two rate cuts by the Federal Reserve (Fed) that helped drive down bond yields.

Through it all, stocks finished little changed for the third quarter, as well as for the past month. The S&P 500®, which closed September at 2,976.74, was up 1.19% for the third quarter and up 1.72% for the month.

man checking watch

Bond yields declined during the quarter as the Fed made two rate cuts of 0.25% – one in July and another in September – reducing the target range to 1.75% to 2.00%. The yield on 10-year Treasuries has slid from 2.00% at the end of the second quarter to 1.68% at the September close.

Here are some other recent economic highlights that are covered in greater detail later in this report (Exhibit 1):

  • Retail sales strong. Retail sales were up 0.4% in August from the previous month, according to the Department of Commerce
  • Job growth continues. The economy added 130,000 new jobs in August, according to the U.S. Department of Labor.
  • Oil prices sluggish. While oil prices spiked briefly after a September attack on Saudi Arabian oil fields, prices declined during the third quarter as demand dwindled amidst the global economic slowdown.

Drilling down

U.S. stocks stall

The S&P 500 rose 1.72% for the month, from 2,926.46 at the August close to 2,976.74 at the end of September (Exhibit 2). For the quarter, the index rose just 1.19%. It is still up 18.74% for all of 2019. (The S&P 500 is a market-cap-weighted index that represents the average performance of a group of 500 large capitalization stocks.) 

The total return of the S&P 500 (including dividends) was 1.87% in September and 1.70% for the third quarter.

The NASDAQ Index was virtually even for the quarter, dropping 0.09% from 8,006.24 at the end of the second quarter to 7,999.34 at the September close. For the month, it was up 0.46% from the August close of 7,962.88.

For the year, the NASDAQ is still up 20.56%. (The NASDAQ – National Association of Securities Dealers Automated Quotations – is an electronic stock exchange with more than 3,300 company listings.)

Retail sales strong

Total retail sales for August were up 0.4% from the previous month as internet sales continued to show strong gains, according to the Department of Commerce report September 13. Sales were up 4.1% from a year earlier.

Non-store retailers (primarily online) were up 1.6% from the previous month and 16.0% from a year earlier. After a down month in July, motor vehicle sales rebounded in August – up 1.8% from the previous month and 7.0% from a year earlier. Building materials also had a strong month – up 1.4% from the previous month but down 1.0% from a year earlier.

Employment keeps climbing

U.S. employers added 130,000 new jobs in August, and the unemployment rate remained at 3.7%, according to the U.S. Bureau of Labor Statistics Employment Situation Report issued September 6.

Average hourly earnings increased by $0.11 for the month to $28.11. Over the past 12 months, wages have increased 3.2%. The number of unemployed persons was essentially unchanged at 6.0 million.

Most sectors move up

Most of the 11 sectors of the S&P 500 moved up for the third quarter. Leading the way were Utilities, up 9.33%, Real Estate, up 7.71%, Consumer Staples, up 6.11%, and Information Technology, up 3.34%. Biggest losers were Energy, down 6.30%, and Health Care, down 2.25%.

The only sector that lost ground for the month of September was Health Care, down 0.17%.

Exhibit 3 shows the results of the 11 sectors for the past month, the third quarter and all of 2019.

Treasury yields sink

The yield on 10-year U.S. Treasuries dropped during the third quarter as the Fed made two small rate cuts. The yield fell from 2.00% at the end of the second quarter to 1.68% at the September close (Exhibit 4).

Corporate earnings growth slowing

After strong corporate earnings growth throughout 2018, projected earnings growth has slowed down significantly in 2019. The estimated 12-month forward earnings per aggregate share of the S&P 500 was up only 1.93% through the first three quarters of 2019 (Exhibit 5).

The 12-month forward price-earnings ratio (P/E) of the S&P 500 held steady in the third quarter as stock market performance stalled. After closing the second quarter at 16.75, the P/E inched up to 16.82 at the close of the third quarter (Exhibit 6).

The forward 12-months earning yield for the S&P 500, which is the inverse of the P/E, ended the third quarter at 5.96%, which was little changed from the 5.99% yield at the close of the second quarter (Exhibit 7). The 12-month forward earnings yield can be helpful in comparing equity earnings yields with current bond yields. The S&P 500 earnings yield is still significantly higher than the 1.68% rate of 10-year U.S. Treasuries.

Dollar mixed versus Euro and Yen

Through the first three quarters of 2019, the dollar has declined versus the Yen and strengthened versus the Euro. The Euro is down 9.21% versus the dollar this year – and down 1.00% over the past month (Exhibit 8).

The dollar is down 4.06% versus the Yen through the first nine months of 2019, but the dollar is up 1.82% versus the Yen over the past month (Exhibit 9).

Oil prices dip

Aside from a quick spike in oil prices after the September 14 attack on the Saudi Arabian oil fields, oil prices trended down through the third quarter. The price of a barrel of West Texas Intermediate, a grade of crude oil used as a benchmark in oil pricing, closed the third quarter at $54.07 – down 7.53% from the second quarter close of $58.47 (Exhibit 10). For the month of September, oil was down 1.87%.

The declining prices are largely due to a decrease in demand caused by a slowing global economy. Demand growth estimates for 2019 have declined from about 1.4 to 1.5 million barrels per day to 1.0 to 1.1 million barrels per day.

Gold still rising

Gold prices had a strong move in the third quarter, from $1,413.70 an ounce at the end of June to $1,472.90 at the September close – a 4.19% gain (Exhibit 11). For the year, gold is up 12.50% after closing 2018 at $1,281.30.

International equities bounce back

The MSCI EAFE Index, which tracks developed-economy stocks in Europe, Asia and Australia, rebounded modestly in September after dropping nearly 3% in August. The index was up 2.54% in September, finishing the month at 1,889.36 (Exhibit 12). For the third quarter, the index was down 1.71%, but it is still up 9.85% for the year.

What's ahead for the economy and the markets? See Can Consumers Keep Economy Rolling as Manufacturing Slows? by Mark Simenstad, Chief Investment Strategist




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