What do ongoing trade tensions, geopolitical instability, and central bank stimulus mean to your wealth? John Gullo, MBA, CFA, CFP, CIMA®, explains in his 15-Minute Financial Update for Q3 2019.
The third quarter was characterized by increased trading tensions, geopolitical instability, slowing global economic growth, and increased stimulus from central banks. While much of the news flow was negative, additional stimulus from the U.S. Federal Reserve and European Central Bank helped to neutralize concerns, leading to a flat quarter for global stocks as a whole. Within the more interest rate sensitive assets classes, the central bank stimulus helped boost returns for real estate and infrastructure, as well as both taxable and municipal bonds.
| Q3 2019 | 2019 YTD | ||
| Core Bonds – Taxable | 2.3% | 8.5% | |
| Core Bonds – Municipal | 0.5% | 4.4% | |
| Global Stocks (as a whole) | 0.0% | 16.2% | |
| U.S. Large Stocks | 1.7% | 20.6% | |
| U.S. Mid Stocks | -0.1% | 17.9% | |
| U.S. Small Stocks | -0.2% | 13.5% | |
| Foreign Developed Stocks | -1.1% | 12.8% | |
| Emerging Market Stocks | -4.3% | 5.9% | |
| Commodities | -1.8% | 3.1% | |
| Real Estate | 5.7% | 22.3% | |
As mentioned above, global stocks were virtually unchanged during the third quarter, falling just 0.03%. When we dig a little deeper, however, there is quite a bit of discrepancy with U.S. stocks rising and foreign stocks falling. Interestingly, this difference can be largely explained by changes in the value of the U.S. dollar.
Compared to currencies of our foreign trading partners, the U.S. dollar rose 2.5% during the quarter. As such, in local currency terms, returns look a little better; performance of foreign developed stocks changed substantially, from -1.1% to +1.8%. Similarly, emerging market losses were cut in half.
To keep the U.S. economy strong in the face of some notable developments, the Federal Reserve announced 2019’s second interest rate cut on September 18. Similar to the first cut, which took place earlier in the year, this step was taken as insurance against ongoing risks.
As a result, short-term interest rates are now back below 2%. A move applauded by borrowers but criticized by conservative savers.
On September 14, drone strikes on two major Saudi oil facilities knocked out more than half of the producer’s output. Following the attacks, oil prices spiked over 10% as supply concerns ensued. Meanwhile, the world waited to see if there would be a military response on either the terrorist group (which claimed responsibility), or on the country of Iran (who U.S. government officials believed was ultimately operating behind the scenes). Tensions eased after a few short days when Saudi production recovered and U.S. officials decided to implement economic sanctions against Iran, rather than military action.
Over the past several months, many have been concerned that tariffs and trade tensions between the U.S. and many of its foreign trading partners would lead to a slowdown in global trade. While results have not been devastating to date, global merchandise trade has fallen by 0.2% so far in 2019.
When we break trade down geographically, as expected it is the emerging economies that are suffering more than the advanced economies. What is surprising is China. China’s exports have increased year to date. Many economists believe, however, that should trade tensions continue to accelerate in the months to come and an increasing number of U.S. corporations move production of finished goods (or even components of finished goods) to other countries, it is unlikely business elsewhere in the world will be enough to offset the loss for China.
With Europe and Japan’s economy struggling, it is not surprising that some additional steps have been taken to boost economic activity there. What is surprising, however, is the degree to which the foreign central banks are easing. While U.S. short-term interest rates are just below 2%, those same interest rates are below zero in Europe and Japan.
In addition, both central banks have purchased trillions of dollars of assets to help boost economic activity. These purchases have increased the size of both central banks’ balance sheets to greater than $5.0 trillion each.
That figure is quite significant for Japan, whose central bank has become the first among major industrialized nations to own assets collectively worth more than the value of all goods and services produced within the country annually.