Positive month for markets caps off turbulent quarter
U.S. markets had a positive September. The S&P 500 returned 1.87 percent in September and 1.70 percent for the quarter. The Dow Jones Industrial Average had a 2.05 percent monthly gain and quarterly growth of 1.83 percent. The Nasdaq Composite showed a 0.54 percent monthly gain and a 0.18 percent quarterly gain.
These results came despite worsening fundamentals. According to Bloomberg Intelligence, the S&P 500 is expected to show a year-over-year earnings decline of 3.2 percent for the third quarter. Analysts expect 3.3 percent growth in the fourth quarter. From a technical perspective, all three major U.S. indices spent the month above their 200-day trend lines.
International stocks had a strong September but saw volatility earlier in the quarter. The MSCI EAFE Index gained 2.87 percent in September but had a quarterly loss of 1.07 percent. Emerging markets gained 1.94 percent during the month but showed a drop of 4.11 percent for the quarter.
Technicals were mixed for international stocks. The MSCI EAFE Index for developed international markets fell below its trend line at the start of the month but then recovered. The emerging markets index spent the majority of the month below the trend line.
Fixed income had a tough month, with whipsawing interest rates creating volatility. The 10-year Treasury yield started the month at 1.47 percent, rose to 1.90 percent, and finished at 1.67 percent.
The Bloomberg Barclays U.S. Aggregate Bond Index declined by 0.53 percent during the month, on higher rates. But it rose by 2.27 percent during the quarter, as rates went down. High-yield bonds gained 0.36 percent, leading the high-yield index to a 1.33 percent quarterly gain.
Headlines hit markets, but not much
September was full of newsworthy events. For example, there was a drone attack on Saudi oil facilities. Still, there was no sustained impact on U.S. equity markets. Oil prices spiked 20 percent, but they remain below levels seen a year ago.
The U.S.-China trade war and Brexit also made news, although neither had much influence on markets. New negotiations between the U.S. and China were announced for October, which helped drive up equity markets. This bump didn’t last, as the S&P 500 ended the month below post-announcement highs.
In September, Brexit’s impact on international markets was minimal. The ongoing negotiations may be a source of future volatility for internationally developed markets.
Economic fundamentals withstand the risks
Many economic releases came in better than expected, with consumer spending playing a key role. August retail sales figures revealed 0.4 percent growth. Consumers have been driving the economic expansion for the past two quarters.
Personal income grew by 0.4 percent in August. Plus, August’s employment report showed wages up 0.4 percent on a monthly basis.
The housing sector was also strong. In September, homebuilder confidence increased to an 11-month high. Strong homebuyer demand and low mortgage rates boosted sales, with new and existing home sales beating expectations. August marked the second straight month of year-over-year growth in existing home sales (see Figure 1).
Figure 1. Existing Home Sales, September 2014–August 2019
Nonmanufacturer confidence saw a rebound in August, and manufacturing output rose by 0.5 percent.
Beware the risks ahead
Despite the positive fundamentals, risks remain. The uncertainty surrounding the impeachment proceedings may weigh on consumer and business confidence and spending. Slowing job growth and declining consumer confidence figures should also be watched. Abroad, the U.S.-China trade war and Brexit could affect markets.
Consumer spending growth has been healthy this year, and there are few signs of a slowdown. The rebound in service sector confidence and manufacturing output also indicates the fundamentals may be more resilient than they seem.
Volatility is possible and even likely. But the healthy U.S. economic background should help calm fears of a sustained downturn if we face market turbulence. A well-diversified portfolio and a long-term view toward investing remain the best way forward in an uncertain world.