Equities marched higher despite the possibility of a trade war with China. Much of the risk with other trading partners has abated as progress on trade continued; however, the risk with China has grown.
For the 3rd quarter the S&P 500 gained 7.7%, 10.6% year-to-date. Small cap stocks lagged, gaining 3.6%, but have outpaced large caps year-to-date with an 11.5% gain.
For multi-asset class investors, returns have not kept pace. The threat of tariffs, along with a rising dollar, has adversely impacted foreign stocks, as well as emerging market bonds. Through the first three quarters, international large and small cap stocks, infrastructure stocks, emerging market stocks, and emerging market bonds are all in negative territory.
Emerging markets were hit especially hard because of problems in Turkey, Argentina, and Venezuela. While the economic problems in each country are unique, they all stem from political mismanagement. The Turkish lira, Argentine peso, and Venezuelan bolivar fell against the US dollar. The bolivar plunged 95% in one night.
Oil was flat as OPEC output slumped due to problems in Venezuela. However, production increases in Russia and the US offset this reduction. Still, price declines in hard and soft commodities pushed the index 4.8% lower, bringing the index to a decline of 3.9% year-to-date.
Many other alternatives have struggled this year as well. Real estate is barely positive, while managed futures, market neutral, and global macro strategies remain under water.
The Fed continued to push rates higher and raised the benchmark rate .25% for the third time this year. Low inflation and unemployment are allowing the Fed to move rates higher; however, the rise has led to a flat yield curve. Yields on 10-year Treasuries ended at about 3%, with yields on the 2-year and 30-year Treasuries below and above that mark by approximately 20 basis points, respectively. Consequently, holders of shorter term bonds saw returns hovering about 1%, while holders of longer-term bonds saw negative returns.
As the quarter ended, President Trump agreed to a new trade deal with Canada, creating a new agreement to replace NAFTA. Earlier, a revised Korea-US free trade deal was signed. Having already given temporary exemptions from tariffs to the EU and Japan, the President can now focus his attention on trade talks with China. The President is resolved on reducing tariffs on US exports and protecting intellectual property theft. According to the Commission on the Theft of American IP, total theft of US trade secrets is anywhere from $180 billion to $540 billion per year and most of that comes from China. So, the stakes are bigger for both countries and the US and China are digging in their heels. Therefore, don’t expect a quick resolution.
While domestic stocks remain pricey, they have cheapened recently due to strong earnings growth. And although interest rate rises tend to dampen economic growth and stock prices, historically, when the 10-year Treasury is below 5% stocks have risen along with the rate hikes.
Equities have moved higher for an extended period. But fiscal stimulus and corporate earnings growth bode well for prices in the near term and tariffs should not derail the current optimism.
Washington Trust Bank believes that the information used in this study was obtained from reliable sources, but we do not guarantee its accuracy. Neither the information nor any opinion expressed constitutes a solicitation for business or a recommendation of the purchase or sale of securities or commodities.
Rick Cloutier, CFA is the Chief Investment Strategist for Washington Trust Bank with over 25 years of portfolio management and investment experience. He is responsible for directing the portfolio management, research, and trading activities for the bank’s multi-asset class strategies. He is also responsible for overseeing the client portfolio manager team and portfolio analytics team. Rick has written numerous articles for Investopedia and wrote a weekly column for the Fall River Herald News in Massachusetts. His research has appeared in numerous journals, including the Journal of Investment Management and Financial Innovations, the Journal of Business Management and Economics, and the International Journal of Revenue Management. He provided a nightly commentary on WALE radio and authored the novel Caveat Emptor. Rick earned his MBA at Boston University.