Fourth Quarter 2019

Thus far, 2019 has been a great year for stock investors.  As of September 30th, the S&P 500 was up 18.74% with all industry sectors participating.  Sectors posting the largest gains were Real Estate and Information Technology up 29.71% and 31.37%, respectively.  Sectors posting the smallest gains were Health Care and Energy up only 5.64% and 6.00%, respectively.  Broad participation is a healthy market indicator. 

But, it has been a mixed bag for bond investors.  On the one hand, bond prices have risen since July due to two Fed rate cuts.  Investors in long-term bonds realized the biggest gains because long-term bonds rise the most when rates fall.  On the other hand, the two rate cuts have hurt retirees and other investors seeking current income.  Once again, they are facing a choice between current income, consistent with principal preservation, or ramping up their risk profile in a quest for higher income. 

The Fed and Interest Rates

At its July 31st meeting, the Fed cut its key fed funds rate by ¼ of 1% to 2.25%, reversing the course it had set in late 2018.  Also, it signaled it would cut rates again if the U.S. economy

The federal funds rate is the interest rate at which banks loan reserve funds to other banks on an overnight and uncollateralized basis.

showed further signs of weakness. 

At its mid-September, the Fed cut rates by a further ¼ of 1% to 2.00% but, this time, with three dissenting and divergent votes.  St. Louis Fed President James Bullard dissented, calling for a larger rate cut of ½ of 1%.  Whereas, Boston Fed President Eric Rosengren and Kansas City Fed President remained steadfast in their calls for no cut at all.    

The dissent is spreading.  Currently, only 7 of the 17 members favor another cut while 5 favor none.  This suggests a Fed that may be unsure if its monetary policy should focus on economic data (like GDP growth, inflation and unemployment) or the potential impact of a prolonged trade war with China.  We suspect the Fed will vote for one more rate cut before year-end.  But, we suspect it will be a “one and done” based on current economic data and the progress being made in trade negotiations with China. 

Presidential Election Year

Historically, Presidential Election Years give us positive investment returns.  Since 1928, we have had 22 of them and experienced positive returns in all but 4 (9%). 

A normal yield curve is evidenced by lower short-term rates than long-term rates and it is often seen during periods of healthy economic growth.  For example, the 30-year Treasury bond might yield 3% more than the 3-month Treasury bill.

An inverted yield curve is evidenced by higher short-term rates than long-term rates and it is often seen as predicting an economic slowdown.

Although this is a mature market, we suspect 2020 will be a reasonably good year based on fundamental factors.  America remains “the” bright spot in the global economy.  While the street is forecasting 2019 corporate earnings growth of only 0-3%, they are forecasting an acceleration in 2020 to 5-11%[1].  Employment continues climbing, wages continue growing and consumers continue spending. 

Although there was concern earlier this year that the yield curve had inverted, the reality is that it is fairly flat across the 2-year to 30-year spectrum of Treasuries securities.  That said; based on the considerable quantitative easing that remains to be unwound, we suspect the yield curve has lost some of its predictive luster and do not believe it is predicting recession at this time.


[1] Yardeni Research, October 21, 2019.


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