Mostly Strong Gains Amid Geopolitical Uncertainty

Equity Markets

The S&P 500 gained 1.7% in the third quarter, and 20.6% for the year to date. However, returns were mixed across sectors. Utilities (+9.3%) and Real Estate (+7.7%) both benefited from lower interest rates. Gains for both sectors are approaching 30% on a year-to-date basis. Energy, hurt by falling oil prices, lost 6.3% and is up only 6.0% for the year. Health Care was another poor performer, down 2.2% and up 5.6% YTD.

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From a style perspective, value mounted a comeback late in the quarter, but over the full quarter returns across styles were similar (Russell 1000: +1.4%; Russell 1000 Growth: +1.5%; Russell 1000 Value: +1.4%). Small caps underperformed large caps (Russell 2000: -2.4% vs. Russell 1000: +1.4%) and, notably, small cap value outperformed small cap growth by a significant margin (Russell 2000 Value: -0.6% vs. Russell 2000 Growth: -4.2%).

Overseas, the strong U.S. dollar hurt results. The MSCI ACWI ex USA Index fell 1.8%, with emerging markets (MSCI Emerging Markets: -4.2%) underperforming developed (MSCI EAFE: -1.1%). The U.K. sank 2.5% due solely to performance of its currency, which lost just over 3% versus the U.S. dollar on Brexit-related woes. Japan (+3.1%) was one of the few countries to post a positive return, but the yen was also relatively flat vs. the U.S. dollar. EM countries were generally down, with Brazil, India, and China falling about 5% and Russia down a more modest 1.4%. Political uncertainty in Argentina caused its market to lose half its value in August (-47%); that said, Argentina just entered the Index in May 2019 and accounts for less than 1%. Value underperformed growth in both developed and emerging markets for the quarter, widening the spread on a YTD basis. From a sector standpoint, Technology (MSCI ACWI ex USA Technology: +2.2%) was up the most while Materials (-6.5%) and Energy (-4.6%) performed the worst.

Fixed Income Markets

Ten-year U.S. Treasury yields were volatile in the third quarter, especially in September, hitting a 2019 low of 1.40% on Sept. 4, soaring to 1.90% mid-month and closing the quarter at 1.68%, down 32 bps from June 30. U.S. Treasuries thus posted strong results (Bloomberg Barclays US Treasury Index: +2.4%). Long U.S. Treasuries jumped (Bloomberg Barclays Long US Treasury Index: +7.9%; +19.8% YTD) in the falling rate environment. The Bloomberg Barclays US Aggregate Bond Index rose 2.3%, bringing its YTD gain to 8.5%. High yield was up just over 1% (+11.4% YTD) but, notably, lower quality significantly underperformed (CCC: -1.8% vs. BB: +2.0%, and +5.6% vs. +12.8% YTD) representing some concern about deteriorating quality at the lower end of the spectrum. TIPS (Bloomberg Barclays TIPS: +1.3%) underperformed as inflation expectations waned; 10-year breakeven spreads were 1.53% as of quarter-end, down from 1.69% as of June 30. The 10-year real yield dipped briefly into negative territory in early September. Municipal bonds performed well, but did not keep pace with U.S. Treasuries (Bloomberg Barclays Muni: +1.6%; +6.7% YTD). The shorter-duration Bloomberg Barclays Muni 1-10 Year lagged with gains of 0.8% for the quarter and 4.7% YTD.

Rates fell overseas as well, but the U.S. dollar appreciated versus most currencies. The Bloomberg Barclays Global Aggregate ex US Bond Index fell 0.6% (unhedged) while the hedged version was up 2.8% for the quarter. Emerging market debt returns were roughly flat (JPM EMBI Global Diversified: +1.5%; JPM GBI-EM Global Diversified: -0.8%) but both are up sharply YTD (+13.0%, +7.9%, respectively). Within the dollar-denominated benchmark, Argentina (-42%) and Venezuela (-51%) were among the few to post negative returns. Conversely, returns in the local debt benchmark were more mixed with Turkey (+19%) and Argentina (-60%) being outliers.

Real Assets

Given the declining rate environment witnessed during the third quarter, several real asset categories performed well, notably both listed real estate (FTSE Nareit Equity Index: +7.8%; +27.0% YTD) and infrastructure (DJB Global Infrastructure: +2.5%; +23.8% YTD). But while the MLP category also generally benefits from declining rate environments, volatile and falling oil prices weighed more heavily on the space in the quarter (Alerian MLP Index: -5.0%; +11.0% YTD). Oil prices slid from $58.47 to $54.07 (WTI) during the quarter and the energy-heavy Goldman Sachs Commodity Index was off 4.2%, while Gold (S&P Gold spot price: +4.3%; +15.0% YTD) benefited from its safe haven status. Looking across the rest of the commodity complex, Agriculture Commodities finished in negative territory (Bloomberg Commodity Agriculture Subindex: -6.2%), weighed down by coffee, corn, and cotton in particular, while nickel (+35.5%) almost single-handedly lifted the Industrial Metals Subindex (+2.4%) into positive territory for the quarter.


Markets were subdued as the quarter ended in spite of an unexpected impeachment inquiry into the president of the U.S., an uncertain Brexit outcome, violence in Hong Kong, and other assorted challenges. Trade negotiations are slated to continue, but uncertainty remains. Returns across capital markets have been outsized in 2019, especially in the U.S., where stock markets have rewarded investors with 20% results and fixed income is up nearly 10%. There appears to be ample fuel for lowered expectations going forward, but we continue to guide investors to adhere to a disciplined process that includes an appropriate and well-defined long-term asset allocation policy.