Looking Ahead to the Final Trimester of 2019

Financial markets 2019

There are a variety of predictions out there for the final trimester of 2019, with varying outlooks for the stock and bond markets, which indicates that there is lots of guessing.

2019 has thus far been a tale of two trimesters as far as the stock market is concerned. The first four months brought us about a 17% gain for stocks, and sitting at the end of the second four-month period, we’re right back where we started.

We’re actually also right back where we started in January 2018, which tells us that in spite of the long bull market still being touted with stock indexes, we really haven’t made any progress over the last 5 trimesters, not just in the last one.

The bond market, on the other hand, started taking off last fall and has shown no signs of letting up. Bonds are not normally this bullish, but they sure have been lately, and the move has us eyeing record prices for U.S. treasuries set in 2016 which are now coming into reach.

Many people see all this as treasuries collapsing, but nothing could be further from the truth actually, as they have instead been red hot and haven’t shown us much lately to suggest that they will be cooling off very much.

Interest rates don’t just play an influential role in bonds like they do with stocks, they play a dominant role. Bonds don’t go up because people get excited about low interest rates like they do with stocks, as interest rates influence bond prices directly, and do so in a profound way.

It’s no accident that bond prices have risen considerably since the Fed’s rate cut, and like with stocks, the bond market also prices in future expected rate cuts. When the cuts do come, bonds cannot avoid rallying because the certainty and effect of the cuts come home to roost, unlike the fickler stock market that will often react to these cuts in an unusual way, like we saw with this last one.

If we’re looking to forecast what might be expected in the third trimester of 2019, we need to look at what is moving markets now and look to predict how these things may affect things over the course of the rest of the year as well as what else we might expect that may weigh in.

Forecasts like this should only be used as a broad guide though, because they are based upon incomplete information, and when the information that is used becomes more completed over time, we need to adjust our expectations and predictions accordingly.

Stocks Don’t Look Like They Are Going Anywhere Fast

We don’t really have that much momentum overall with stocks, and while we did break through the resistance points set in January 2018 and again in April 2019 during the July rally, when everyone was so excited about the Fed cutting rates, the rate cut has come and gone, and there is talk of more, this last one surely didn’t do anything for us.

Stock markets have presumably priced in more cuts, but even this has not been enough to move us further up. It is reasonable therefore to expect that if these cuts do come, and even if we get the two that some think we will, this probably won’t be enough to do too much for the market.

What we may see instead is another move in the other direction similar to what we just saw in August. While we did recover somewhat from this during the past four trading days to end the month, we’re still off by about 4% from where we were before the rate cut.

While the ongoing trade issues is still the big millstone around the neck of the stock market, there’s also the threat of bonds rallying even more, and scaring people out of stocks even more. The trend upward continues, and more rate cuts will likely put treasury prices up even more and scare people again, just like we just saw. There is no reason to fear this but stock markets don’t need one, as unjustified fear weighs just as much pound for pound as the justified kind.

Opinions on where the stock market may be headed over the rest of 2019 range from a further gain of 5.9% to a loss from here of 7.7%, which if nothing else, demonstrates just how much guessing is involved with these things. We’re seeing the same thing with treasuries, with a range for the 10-year as low as 1.25% and has high as 2.15%.

The biggest variable here is whether the trade war between the U.S. and China improves or deteriorates. It’s hard to imagine a deal getting done anytime soon though, and it’s also hard to imagine things getting much worse.

We’re at an impasse with the two sides remaining quite far apart, and if that’s all we have to show for all this time, this doesn’t bode well for the rest of 2019. It may very well be that we will need a new president to get this deal done, but the current one can’t do much more than he is without seriously upsetting the people he hopes will vote for him a little over a year from now.

We’ve already seen some backing off on some of the proposed tariffs and it’s reasonable to assume that if we are not at the threshold, we’re pretty close to it. If the markets could tolerate the hits that they took from this in the second trimester, they should be able to manage whatever Trump and Company may throw at it in the third one.

This would lead us to believe that this coming trimester should see the trade war having a fairly neutral effect upon the markets, where there will neither be much to be happy about nor much to be upset about. Given that this trimester may be less upsetting, we may see a bit of a positive influence in this one, but not enough to move all that much forward.

It’s also hard to see the actions of the Fed doing much for stocks, even if they decide to cut another half of a point by the end of the year. There’s too much of this priced in already for it to make that much difference, and we also have to deal with more fears of a recession if and when they do this, especially when we see bond prices rise more as a result.

Seeking More Solid Gains with Less Risk

Bonds just keep on rolling though, and there’s really nothing much to stop them from going even higher, with the trade war, economic struggles elsewhere, and lower rates all pushing their prices higher. With the economy and the strong demand for the U.S. dollar remaining, this leaves us with both the desire and the means to prop up treasuries even more, and this is the most likely scenario.

Those in bonds should certainly sit tight for a while at least, and if someone were looking to decide once and for all whether to keep their bonds until the end of the year, there are good reasons to do so. Ideally though, we’d still keep a close eye on things and if this outlook changes significantly enough, expectations need to be adjusted.

The same holds true for stocks, and there really isn’t anywhere near the sort of risk out there for the rest of 2019 that people that wouldn’t normally get out unless things really got bad should also sit tight and watch.

On a balance of probabilities, with what we now know, it’s likely that stocks will probably stay within their current range, meaning between the lows of May and the highs of July, and those who rode out these moves certainly aren’t going to be concerned about this since this all happened already and they are still in. We might see a new high made at some point along the way but unless we make some real progress in the trade talks, this issue alone will likely limit the amount of the high to keep it fairly modest.

Those who are looking to pull back from the amount of stocks they hold generally will look to bonds to seek to cushion whatever blow they may see, and given the performance and outlook of the bond market, we’re at a time where this does make sense. Using bonds as a hedge against the stock market has nothing to do with yields and even negative yields for that matter, and have everything to do with a positive expectation of price gains that may exceed that of competing investments like stocks, as well as hedging some of the risks that stocks involve.

We should also be thinking of utility stocks during these times, and utility stocks have more pop than bonds do while still allowing us to hedge against stock market risk. We need not even select individual stocks though, and can go with something like the Utilities Select Sector SPDR Fund.

The fund actually moved up since the rate cut, unlike stocks. It did particularly well in August, up 5% versus the stock market’s 4% loss, and gained 8% in the second trimester compared to stock indexes just treading water overall.

There is a reason why utilities are doing particularly well lately, and it’s because these companies particularly like lower interest rates. If we are expecting more of this during the next 4 months, this makes a fund like this particularly appealing, where we may not only outperform broader indexes, we will do it with less risk as well, a tempting combination indeed.

For those who think that a fund like this just doesn’t have anywhere near the juice as the broader indexes such as the S&P, this fund actually has outperformed the market thus far in 2019, with an 18% gain now instead of just the 17% that the S&P 500 has given us.

This is because of the year that we’ve put in, or the last year and 8 months actually, where the S&P 500 hasn’t gained anything, versus the 22% that this utility fund provided its investors.

You won’t get the same long-term gains with utilities, for instance the fund is only up 164% over the last 10 years, which is only about half of what the S&P 500 has provided, but this is all about picking your spots. When we are moving up without any real issues, broader indexes are better, but the more question marks there are out there, the more a utility stock makes sense, because of the superior way utility stocks manage risk in more questionable times.

Utility stocks and utility funds have a time and place, including right here right now, so mixing in a good amount of this to bolster our portfolios for whatever may come during the rest of the year really does make sense.

Even with investing in more solid and reliable assets such as utilities and bonds, this still requires us to watch the action unfold, and we should never cling to old ideas such as these forecasts when real life ends up not co-operating.


Editor, MarketReview.com

Monica uses a balanced approach to investment analysis, ensuring that we looking at the right things and not confined to a single and limiting theory which can lead us astray.