Over the past quarter, a flurry of
international events dominated headlines, and in parallel, the global equity
markets have experienced volatility without much direction. The global trade
issues drove the news cycle, primarily driven by the conflict between the
United States and China over tariffs.
In addition, recession fears have
increased over the past few months with speculation from commentators that a
recession could start globally in 2020 or even sooner. A recent Bloomberg
article eloquently stated, "Taking a page from aviation, in which the
stall speed is the slowest a plane can fly while still maintaining a level
flight, the economic equivalent is the point at which growth is no longer
self-sustaining." 1 The slowing economic growth
globally does not automatically lead to a recession, which is defined as two
consecutive quarters of negative GDP growth, but the airplane metaphor seems
apropos. What impact this may have on markets is unknown since market returns
are not correlated with economic cycles.
Regardless of the economic news, the
volatility in the markets has been palpable. From July 1 to September 30, there
were five days when the stock market lost more than 1%, and there were nine
days when the market gained more than 1%.2 We are reminded that
stock prices can and will fluctuate but this alone should not stipulate a
change in course.
Bonds continued their strong
performance, led by long-term government bonds, which were up 7.92% on the
quarter.3 As long-term interest rates continued to trend lower,
what stands out is how inflation expectations have continued to drop.
Currently, 30-year inflation expectations have dropped to 1.65%, which is one
of the lowest readings on record.4
The good news is that the purchasing
power of a dollar is expected to stay relatively stable over the next few
decades because of low inflation. The bad news is that for those receiving or
expecting to receive Social Security, there are likely to be very small yearly
inflation adjustments going forward according to market expectations.
Sources
1 Reade Pickert, "U.S. Slowdown Spurs Concern Economy Is Near Stalling." Bloomberg, October 1, 2019 (Updated October 2, 2019).
2 U.S. stocks as proxied by the S&P 500 Index.
3 Long-term U.S. Treasury securities as proxied by the Bloomberg Barclays U.S. Treasury Bond Index Long.
4 "30-year
Breakeven Inflation Rate [T30YIEM]." Federal Reserve Bank of St. Louis.
Retrieved from FRED, Federal Reserve Bank of St. Louis, October 3,
2019.