From our Investment Committee | Q3 2019
Global stock markets were mixed in the third quarter. U.S. large-cap stocks performed well, but U.S. small-cap and non-U.S. stocks struggled. While we never know for sure what caused market prices to move, continuing trade tensions, an attack on major Saudi oil facilities, slowing global economic growth, and falling interest rates were all potential sources of market volatility.
For the quarter, U.S. stocks (as measured by the S&P 500 Index) gained 1.7%, and non-U.S. developed market stocks (as measured by the MSCI World Ex U.S. Index) fell 0.9%. Emerging market stocks (as measured by the MSCI Emerging Markets Index) fell 4.3%.
The U.S. Dollar Index, a measure of the value of the U.S. dollar relative to a basket of foreign currencies, rose in the third quarter. Specifically, the U.S. dollar increased by 2.7% compared to foreign currencies. Over the past 12 months, the U.S. dollar has appreciated 3.6%. The increase in the dollar represents a headwind to non-U.S. investments held by U.S. investors.
U.S. interest rates fell during the quarter as the Federal Reserve implemented two reductions, each a quarter of a percentage point, to the federal funds rate. The Fed now targets a range of 1.75% to 2.00% for the federal funds rate. Because changes in interest rates and bond prices are inversely related, the decline in interest rates helped increase the quarterly return for many bond asset classes.
U.S. Economic Review
Positive economic growth in the U.S. continued into 2019’s second quarter.
The final reading for second quarter GDP showed an increase in economic growth of 2.0%.
The unemployment rate reached its lowest level in 50 years with the September 2019 reading coming in at 3.5%.
Domestic inflation remains tame, as the Fed’s preferred gauge of overall inflation, the core Personal Consumption Expenditures (PCE) index, stayed below the central bank’s 2.0% target with a reading of 1.8% in August 2019.
Financial Markets Review
U.S. large-cap stocks and real estate investment trust (REIT) stocks advanced during the quarter, whereas U.S. small-cap and all three non-U.S. stock categories we track were down for the quarter.
The aforementioned strengthening U.S. dollar affected non-U.S. stock returns.
During the quarter, U.S. REIT stocks were the best performing asset class while emerging market value stocks were the worst performing.
U.S. and global bonds added some stability of return during the quarter by posting positive results.
In the U.S., large-cap stocks outperformed small-cap stocks in all style categories. Value stocks outperformed growth stocks in the mid- and small-cap categories. Among the nine style boxes, large-cap growth stocks performed the best, and small-cap growth stocks experienced the largest decline during the quarter.
In developed international markets, most of the nine style boxes were negative for the quarter.
International small-cap value stocks were the lone bright spot.
Similar to the U.S., mid- and small-cap value stocks outperformed mid- and small-cap growth stocks.