Domestic Equity markets posted modest gains during the third quarter of 2019 with the S&P 500 Index increasing 1.7%. Market volatility persisted throughout the quarter with major domestic indices reaching all-time highs in July before reversing in August on the back of geopolitical issues and escalating trade tensions. Trade pressures eased in September and equities rebounded, leaving the S&P 500 Index up 20.6% year-to-date – its best start to a year in over two decades.

Large-cap stocks once again outperformed their small-cap counterparts during the quarter, with the Russell 1000 Index gaining 1.4% and the Russell 2000 Index declining 2.4%. Income generating stocks were the top performers during the quarter with the Utilities, Real Estate, and Consumer Staples sectors returning 9.3%, 7.7%, and 6.1%, respectively. Energy was once again the worst performing sector, down 6.3% during the quarter and down over 19% on a one-year basis. Oil prices have continued to decline due to slowing economic growth, despite a brief spike in September after a drone attack on two major Saudi oil facilities.

Equity markets outside of the U.S. posted modest losses on an aggregate basis during the third quarter. Japanese markets were among the best performers, with the MSCI Japan Index returning 3.1%, due in part to the result of the Upper House elections in July, which provided a platform for policy stability. The MSCI Europe Index fell 1.8% as the Euro depreciated against the dollar, economic growth continued to slow, and fears over a no-deal Brexit and global trade tensions intensified. Emerging markets were some of the worst performers with the MSCI EM Index down 4.2% during the quarter, as investors moved to less risky assets and emerging market currencies struggled. Among the emerging markets, Argentina was one of the worst performers with shares falling almost 47% after market-friendly President Marci lost the nation’s presidential election.

In line with their dovish outlook signaled earlier in the year, the Federal Open Market Committee (“FOMC”) cut rates by 25 basis points at both their July and September meetings, leaving the target range for the federal funds rate at 1.75% to 2.00%. Fed Chairman Jerome Powell failed to provide conclusive guidance for the FOMC’s next move, but markets expect one more 25 basis point rate cut by year end. The yield on the 10-year Treasury fell from 2.02% to 1.47% in August – its lowest level since July 2016 – before rebounding somewhat, ending the quarter at 1.68%. The yield curve for 2- and 10-year Treasuries inverted for the first time since 2007 as the yield on 2-year Treasuries briefly surpassed that of 10-year Treasuries towards the end of August.

The initial estimate of third quarter gross domestic product (GDP) was for 1.9% growth, beating market expectations of 1.6%. Personal consumption expenditures, government spending, and a rebound in exports were the largest drivers of growth. On the other hand, a rise in imports and a sharp decline in business investment as companies spent less on equipment and nonresidential structures detracted from GDP. Consumer and business confidence indices declined significantly in August before rebounding in September. International economies continued to slow as trade and political tensions persisted.

The U.S. unemployment rate fell from 3.7% to 3.5% during the third quarter – its lowest level since December 1969 – while the labor force participation rate increased from 62.9% to 63.2%. The U.S. economy added an average of 157,000 jobs per month during the quarter, the lowest quarterly gain since 2017. The September Jobs Report saw continued increases in employment from the health care and professional and business services sectors.

The year-over-year headline inflation rate increased marginally from 1.6% to 1.7% during the quarter, with increased food prices helping to offset declining energy prices. During the same period, core inflation, which excludes food and energy, increased from 2.1% to 2.4% with upward pressure in transportation services, medical care services, and shelter.