Our team at New England Investment and Retirement Group, Inc. likes to closely monitor the global markets and the economy. We offer our Quarterly Considerations as summaries of market and economic performance so that we can educate our clients and help them make informed decisions about their financial futures.
Global financial markets posted mixed results during the third quarter of 2018 as investors balanced heightened trade tensions globally with strong earnings, a solid labor market and healthy economic growth here in the US. And with the November mid-term elections fast approaching, US politics is front and center, particularly after the bitter fighting surrounding the nomination of Supreme Court Justice Kavanaugh. Domestic equity markets were the performance standouts during the third quarter, as trade rhetoric and a strong US dollar weighed on international developed and emerging markets. And here in the US, large caps outperformed small caps, a reversal from the prior quarter.
In the third quarter, US GDP accelerated from the prior quarter to an annual quarter-over-quarter pace of 4.2%, supported by a strong labor market according to the Bureau of Economic Analysis. Meanwhile, inflation remained moderate, but has risen enough to push the Federal Reserve into a somewhat more aggressive posture as the Fed tightened policy for the third time this year. The labor market remained resilient with unemployment hovering at an 18-year low in July and August at 3.9% before closing out the quarter at 3.7%, the lowest level since 1969. Corporate earnings continued to impress as companies benefited from a strong economy. While many of these metrics help lay the groundwork for continued growth as we close out 2018, Fed tightening and uncertainty coming out of Washington are potential headwinds we’ll be watching closely in the weeks and months ahead.
Looking overseas, developed international equity markets produced mixed results as economic challenges, including trade and tariff concerns, weighed on investor sentiment.
Amid trade war fears, Eurozone GDP held steady in business spending strength at 0.4% on an annual quarter-over-quarter basis, according to Eurostat, while net trade was negative. Germany, the largest Eurozone economy and main exporter, saw its expansion marginally increase from the prior quarter, while growth in France and Italy was tepid. Meanwhile, the European Central Bank kept rates steady but confirmed plans to end its massive bond buying program at year-end. In the Pacific region, Japan’s GDP grew more than expected at 1.9% on an annual quarter-over-quarter basis, bouncing back from a contraction in the previous quarter.
In the emerging markets, returns were negatively impacted by China which fell amid a strong US dollar, waning growth and trade and tariff disputes with the US. Meanwhile, emerging markets such as Turkey, which plummeted 21%, were further pressured by the strong US dollar. After an exceptional showing in 2017, emerging markets are among the worst performing asset classes year-to-date. And expect that volatility will likely persist, particularly over heightened trade war fears and escalating geopolitical events.
Q3 Global Market Returns:
Starting with Fixed Income, as shown on the left of this chart, results were mixed as yields were volatile. The yield curve continued to flatten as shorter-term yields rose more than longer-term yields, and the 10-year Treasury rose and held above the psychologically important 3% level ending the quarter at 3.06, 21 basis points higher than the second quarter. Core US bonds, represented here by the Barclays Agg, closed unchanged with corporates providing the highest returns and mortgages lagging the index. High Yield fared better, rising 2.4%, due to solid economic growth, higher energy prices and rising US equities. Meanwhile, currency-hedged foreign bonds ended the quarter essentially flat. Unhedged foreign bonds suffered from strength in the US dollar and fell 1.7%. Similarly, local currency EMD declined 1.8%. Munis were slightly negative with lower quality issues outperforming higher quality issues.
Within Equities, global results were mixed, with international developed and emerging markets stocks lagging those here in the US. In the emerging markets, Asia lagged, weighed down by lackluster performances from India and China. Among developed international stocks, those in the Pacific ex-Japan region lagged those in Europe. In the US, large caps outperformed small caps, while growth clearly outperformed value.
Now looking at Alternatives to the right of the chart. US real estate advanced during the quarter, while overseas real estate markets moved slightly lower. Commodities declined as gains in energy were offset by declines in metals and agriculture. And MLPs were the best performing real asset class for the second quarter in a row as positive sentiment continued to build.
The quarter was a good reminder that investors must remain mindful of geopolitical and other event risk and the associated volatility that comes with it.
The quarter was marked by heightened global trade tensions. In the US, political issues were front and center ahead of the November mid-terms, leading many to wonder if select policy decisions, legislation or elections were enough to derail financial markets. During the final stretch of 2018, elevated uncertainty in the markets has led NEIRG to adjust asset allocation positions and strategies. The goal has been to reflect a more defensive posture, while still keeping to long term investment methodology and objectives. It is our continued belief that remaining patient and adhering to a well-constructed and diversified investment portfolio, anchored to time horizon and goals, is the prudent course of action for clients.
View our complete analysis of the third quarter of 2018 in our Quarterly Considerations presentation below. Please contact the NEIRG team if you have any questions.