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.
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.