Market Data for the quarter ended September 30, 2019:

• S&P 500 Stock Index: 2977, up 1.2%
• Ten-year Treasury Note Yield: 1.68%, down .33%
• Gold: $1,479 per ounce, up 2.7%
• Oil: $54 per barrel, down 6.5%

Stocks advanced in the third quarter in choppy trade, and bond yields declined, as on again, off again concerns regarding America’s trade war with China buffeted markets. The dynamic of markets has been almost completely hijacked by the waxing and waning of fears surrounding trade. Trade has superseded all other market concerns such as monetary policy or geopolitical issues such as tensions in the Persian Gulf and Brexit. We expect that this trade driven dynamic will continue into the fourth quarter.

The market’s obsession with trade is not without merit. While the US consumer has continued to spend enthusiastically with unemployment at a fifty-year low, corporate investment and manufacturing the world over, including America, have declined. This contraction in investment and manufacturing can principally be laid at the feet of the American-Chinese trade war. The tariffs implemented by both sides thus far, along with the uncertainty surrounding the path forward, have thrown global manufacturing supply chains into a state of paralysis, freezing corporate investment.

While the American economy is driven principally by consumer spending to the tune of 70% of overall activity, corporate investment plays an outsized role in determining economic growth over and above its 10% share of the economy. The reasons for this are two-fold: first, corporate investment fluctuates more violently than consumption, and two, weakness in investment can infect the sentiment of consumers, thus leading to declines in consumer spending. The fear of the market is that the trade war will be pushed to the point that weakness in corporate investments leads to lower consumer spending.

As of yet, that point has not been reached, which is why signals of trade war de-escalation have led to higher share prices and bond yields. The trillion-dollar question facing markets is what the path is moving forward on trade between the US and China. The market seems to be leaning in the direction that the US and China will at least reach some sort of détente that witnesses relaxation of erected trade barriers to some extent, which is why US stock markets are hovering just below all-time highs.

We generally concur with the market’s read on the situation. Given the political difficulties surrounding President Trump, we find it unlikely he would like to add to his woes by triggering a bear market and economic recession through trade war escalation. The Chinese, meanwhile, would like to see an end to trade hostilities, as well, as their economy has come under significant pressure. That having been said, there is ample room on both sides for miscalculation, and markets may take another leg downward if that provers to be the case. That is not our expectation, but it remains a very real possibility.

As mentioned above, there are other risks out there facing the market that have slipped into the background. These include principally the future path of monetary policy, tensions between Saudi Arabia and America versus Iran, and the possibility of the UK leaving the European Union without a trade deal. On monetary policy, the market expects further lowering of overnight interest rates by the Federal Reserve, following two cuts in the second quarter. This is likely to be the case, but if the Fed moves in a more restrictive direction, we would expect markets to react negatively. With Iran, the situation is similar to that of trade in that neither side wants a war but miscalculation on both sides is possible. And finally, the UK leaving the EU without a trade deal would lead to significant stress in the world’s second largest trading bloc, but once again, that is in the interests of neither party, so we view it as unlikely. Despite the low probabilities involved, we will continue to monitor these three areas of risk.

Barring a further escalation in the trade war, we expect stocks to continue to advance into the fourth quarter and likely finish the year at all-time highs. With the easing of trade tensions, we would also expect yields on Treasury notes and bonds to head higher, as fears surrounding economic growth become less acute. For the remainder of 2019, we expect the stock market, as represented by the S&P 500 stock index to trade in a range of 2800 to 3150. It finished the third quarter at 2977.