Note: This market review was published on October 16th, 2019 and may not be reflective of current market or investing issues.
The third quarter of 2019 was a wild ride for U.S. Markets. The S&P 500 hit a new all-time high of 3,027.98 in July only to sell off more than 6.5% by early August. Many of the risks that were influencing markets in the second quarter are still relevant today. There has been little progress made in the trade war between the United States and China, tensions in the Middle East have continued to escalate, and the latest deadline for Brexit is less than a month away.
During the third quarter, the Federal Reserve followed through on their dovish commentary by cutting their benchmark rate by 0.25% in July and September. The future path for the Fed is still in question however. Chairman Powell continues to say that these rate cuts are not part of a cyclical change, rather a mid-cycle correction, meaning that he would prefer not to continue to cut rates in the future. In addition to rate cuts, the Fed also had to intervene in over-night lending markets in order to provide liquidity as there have been multiple spikes in the overnight rate due to a lack of dollar liquidity. If the dollar liquidity issue continues, and the Fed is unable to provide sufficient capital through their current repo operations, a new quantitative easing (QE) cycle might begin.
The trade war between the U.S. and China has seen little progress with increased tariffs from both sides. Tensions have come down over the last few weeks as a potential deal has been tentatively reached. The deal is said to be implemented in phases with the first phase being China purchasing more American agricultural products, primarily soy beans, and the United States agreeing to stop increasing tariffs. No tariffs have been removed at this point; however, pending the first phase of the trade deal, some tariffs have been delayed from the third quarter to the end of the fourth quarter after the holiday shopping season.
Tensions in the Middle East continue to be a significant threat, especially to the oil market. Oil had its largest one day move in history in September following an attack on the largest oil refinery in the world, located in Saudi Arabia. The United States has blamed Iran for the attacks, which has continued to degrade relations between the two nations. While there has not yet been a response to the attack, it is unlikely that tensions will subside anytime soon.
Over the next few months it is likely that central banks around the world will continue stimulus both by cutting rates and by resuming, or increasing, QE. Earnings for U.S. companies are likely to disappoint when they report third quarter results, which could lead to a short-term consolidation in equity markets. As central banks continue to provide stimulus, we will likely see equity markets pick up later in the fourth quarter or early in 2020, although a global recession continues to be a viable threat.
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