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Stocks Remain Volatile, Bond Yields Hit Record Lows

Equities struggled in the month of August both domestically and abroad, as trade tensions continued to escalate and fears of an economic slowdown persisted. The DOW, S&P 500, and NASDAQ lost 1.32%, 1.58%, and 2.60%, respectively. Small caps fared even worse, with the Russell 2000 losing 4.94%. In international markets, the MSCI EAFE (developed) index dipped 2.58%, while the MSCI Emerging Markets index slid 4.85%. U.S. Treasury yields continued to drop, with the 10-year yield settling near 1.50%, and the 30-year yield falling to a record low of 1.94%. This caused bond prices to continue their ascent, as the Barclay’s U.S. Aggregate index added +2.59% for the month. REITs, which are also interest rate sensitive, were the only other bright spot, as the MSCI U.S. REIT index gained an impressive 3.41%.

Gearing Up for Lower Returns. As we’ve discussed in recent newsletters, we have experienced a mixed bag of economic results lately. While unemployment remains low and the U.S. consumer has demonstrated incredible strength, business spending has stalled, manufacturing numbers have dropped, and the yield curve has inverted—all more ominous economic indicators. Equity markets have made it abundantly clear that should we endure further escalations on the trade front without a clean resolution, we will likely enter a recession in the next 12-18 months. This is evidenced by the violent back-and-forth swings in stock prices that have hinged on every word coming from @realDonaldTrump these last several weeks. Meanwhile, slowing or negative growth abroad has led to massive stimulus from global central banks, with more than $17 trillion in international debt now trading with negative yields-to-maturity. This has placed immense pressure on U.S. interest rates as global institutions reach somewhere, anywhere, for a bit of long-term yield. The drop in intermediate and long-term rates has all but forced the Federal Reserve’s hands into another .25% cut later this month.

As a result, the average investor is faced with quite the predicament: buy stocks at elevated multiples and near their all-time highs, or settle for bonds in a historic low-yield environment. This scenario has caused somewhat of a rotation away from high-growth stories into more high-income sectors in the equity markets, such as REITs, utilities and consumer staples, as investors attempt to ride out the storm. The bottom line is that return expectations, both in stocks and bonds, have been dampened in recent months, and will likely remain more modest for the foreseeable future.

Hope for Resolution? Earlier this month, it was announced that the U.S. and China have agreed to meet in October for “a more serious” round of trade negotiations. A material amount of progress here would undoubtedly be helpful both for stock prices and our economic outlook moving forward. Markets celebrated these hopes with robust gains in the first week of September, and a slight uptick in interest rates. However, “tweet risk” remains a factor leading up to the meeting as the President prepares to negotiate, so we can likely expect more ups and downs in the meantime. Stay tuned!

Though uncertainty has risen and the risks highlighted above are quite material, it’s entirely possible that we will indeed see progress with China, and that the very accommodative interest rate environment will help to fuel continued economic growth once businesses and consumers have clarity on trade. This would likely lead to a further advancement in equity prices, and perhaps a bit of a recovery in longer-term interest rates. We will continue to monitor these developments closely and make adjustments as needed in our portfolios. In our upcoming quarterly newsletter, we will take a deeper dive into our year-end expectations and outlook. In the meantime please don’t hesitate to contact your advisor with any questions or concerns.

Advisory services offered through Prime Capital Investment Advisors, LLC. (“PCIA”), a Registered Investment Adviser. PCIA: 6201 College Blvd., 7th Floor, Overland Park, KS 66211. PCIA doing business as Qualified Plan Advisors (“QPA”).

The preceding commentary is provided for informational use only and should not be considered investment advice. Past performance is not a guarantee of future results. Indices mentioned are unmanaged and cannot be invested into directly.

S & P 500 Total Return (TR) “S & P 500” is a broad-based market-weighted index dominated by domestic large-cap equities. 

The Dow Jones Industrial AverageTM “DIJA”, also referred to as “The Dow®”, is a price-weighted measure of 30 U.S. blue-chip companies. The Dow® covers all industries with the exception of transportation and utilities. Monthly Performance and Year-to-Date figure data taken from Yahoo Finance, Blackrock, Benchmark Returns Comparison, and MorningStar.

Eric Krause
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