Market News


Concerns Growing on Outlook for Global Growth. Yet, is the U.S. economy fine, except for trade-related areas?

With the close of the third quarter, continued growth in the labor market, low interest rates and what appears to be an accommodative Federal Reserve helped stocks shrug off this year’s themes of a global economic slowdown and the impact of tariffs on trade.

Similar to the second quarter, it was a seesaw ride for investors in U.S. stocks in the July through September period. Yet, the S&P 500 finished the first nine months of the year with its best year-to-date tally since 1997. This despite more signs that the U.S. isn’t immune from weakening manufacturing activity in Asia and Europe that’s been evident for much of the year. A key measure of U.S. manufacturing activity for September hit its slowest point since June 2009.

And with the release in early October of the Institute for Supply Management’s report on the services sector showing ISM’s main gauge of activity growing at its slowest pace since August 2016, the tone seems to have shifted to a U.S. economy that’s still growing, albeit with those sectors glued to trade being impacted the most. (For more on ISM’s September manufacturing and non-manufacturing reports please see, This Year’s Rebound For Stocks Is Looking Less Rosy With Recent Data, published October 4 on BCJ Insights.)

While September’s report on nonfarm payrolls marked the lowest unemployment rate in nearly 50 years and showed that the U.S. labor market continues to add jobs, average growth is lower when compared to a year ago. Employers added 136,000 jobs in September, and previous figures from August and July were revised upward.

The unemployment rate fell to 3.5% from 3.7% in August – the lowest since December 1969 when it was also 3.5%. Yet, job growth has averaged 161,000 each month thus far in 2019. That compares to an average monthly gain of 223,000 in 2018, according to the Bureau of Labor Statistics.1

With the recent data presenting a mixed picture for the U.S. economy, the sentiment is growing that the Federal Reserve could likely move sooner than later to lower interest rates. If it does so, it would follow cuts the Fed made in July and September to soften the impact on the U.S. economy from trade-related effects and slowing global growth. Expectations for a rate cut at the conclusion of the Fed’s next meeting on October 30 have grown to more than 85% as of October 8, up from 62% the previous week, according to CME FedWatch Tool.

(The CME Group’s FedWatch Tool’s methodology looks at prices on Fed Funds futures contract prices and other factors to come up with its probabilities. It is updated throughout the day and can be found here.)

Whether or not the Fed does cut rates, it will support the funding markets in other ways. Fed Chairman Jerome Powell said in an October 8 speech that the central bank is planning to increase its purchase of short-term Treasury securities. The outcome is to increase bank reserves and maintain short-term lending rates so that the Fed doesn’t have to engage in ongoing market interventions to stave off funding shortages.

Last month, turmoil in the repurchase lending market that is collateralized by Treasury securities and other highly rated securities prompted Fed intervention. The cash lending market is an important driver of overnight and short-term lending among banks, businesses and other financial institutions. Chairman Powell said the plan to grow the Fed’s balance sheet for reserve management purposes shouldn’t be confused with the large-scale asset purchases the central bank “deployed” after the financial crisis, referring to quantitative easing.2

In Europe, another stimulus package was announced in September by the European Central Bank (ECB), measures that were widely anticipated. They include a restart to quantitative easing through the ECB’s bond-buying program and more favorable long-term loans to banks in a bid to increase lending to businesses and consumers.

Central banks across the globe also have been cutting interest rates in recent months to stave off the potential of slowing growth in their domestic economies. In prepared remarks, Kristalina Georgieva, the recently appointed managing director of the International Monetary Fund, said October 8 that the global economy is now in a synchronized slowdown, with 90% of the world expected to post slower growth in 2019.

She said the IMF’s updated World Economic Outlook to be released the following week will show downward revisions for 2019 and 2020. Georgieva called for synchronized policy action and more government stimulus to secure stronger and more resilient growth.3

End of Third Quarter Marked by Stock Market Rotation from Growth to Value

In the final month of the third quarter there was a significant rotation into what had previously been cheap value stocks, namely financial shares and energy stocks, sectors which had been underperforming the broader market in recent years. The rotation was namely out of momentum and high valuation stocks, defensive sectors and technology shares.

As previously noted, the S&P 500 had its best nine-month performance since 1997, gaining 18.74% for the year through September. Back in 1997, the index was up by 27.88% during the same period. In July, the S&P 500 also passed the 3,000 level for the first time in its history, closing above 3,000 on July 12 and hitting an all-time high of 3,027.98 on July 26, according to S&P Dow Jones Indices.4

The other major indexes in the U.S. have also been strong performers through the first three quarters of the year, despite choppy month-to-month results. For the third quarter, the S&P 500 and Dow Jones Industrial Average (DJIA) each rose 1.19%. The Nasdaq Composite fell marginally by 0.09%. Apart from the S&P’s nine-month price gains, the DJIA has gained 15.39%, while the Nasdaq has risen by 20.56% year-to-date through September.



The rotation trade during September was partly sparked by higher yields on government bonds. During August, sovereign debt yields compressed significantly, indicating warning signs about the strength of the global economy. But with yields rising in early September, investors took a cue to seek out value and cyclical stocks, the latter having underperformed in recent months.

After closing out the second quarter with a yield slightly above 2.00%, the 10-year Treasury note traded in a wide range during the quarter, from 1.43% up to 1.91%. It finished the third quarter with a yield of 1.67%, about 17 basis points higher compared to the end of August.

Within the S&P 500’s 11 sectors, financials gained the most in September, up 4.46% from August. The energy sector, this year’s biggest underperformer, posted monthly gains of 3.56%. Energy shares also rose following attacks on oil facilities in Saudi Arabia, which led to higher oil prices.

Consumer stocks, technology and real estate underperformed the broader market. The real estate sector, a strong performer until September, was up by only 0.48%, another sector impacted by the rotation. The health care sector was the only area which fell in September, down 0.32%. “Medicare for All” proposals among Democratic presidential candidates have been weighing on the sector, as it could potentially impact companies’ profits.

The major U.S. indexes are off to a poor start for the fourth quarter. Though October 8, the S&P 500 and DJIA are each down by about 2.80%, while the Nasdaq is off by 2.19%. Upcoming earnings season is among the next important indicator investors will likely be looking to for the health of corporate profitability and if margins are being impacted by trade, labor and costs. As of estimates compiled by October 4, aggregate earnings for companies in the S&P 500 are expected to decline 4.1% in the third quarter compared to a year ago, according to FactSet Research Systems Inc.5

Overseas, signs of an easing in trade rhetoric between the U.S. and China in September helped boost shares in Europe and Asia. However, performance for the third quarter wasn’t positive in general. The S&P Global Broad Market Index (BMI) excluding the U.S. gained 2.58% this past month, but fell 1.65% for the third quarter. Stocks in Korea outperformed with interest in semiconductor and technology shares leading to a 6.37% gain in September, while similar trends helped lead to gains of 3.21% in Taiwan. Chinese shares under performed, declining by 0.33% this past month, according to S&P Dow Jones Indices.



View More Articles



1 Bureau of Labor Statistics. (2019, October 4). Employment Situation Summary [Press Release]. Retrieved from:

2 The Federal Reserve. (2019, October 8). Data-Dependent Monetary Policy in an Evolving Economy. Chair Jerome H. Powell Speech at the 61st Annual Meeting of the National Association for Business Economics, Denver, Colorado. Retrieved from:

3 Georgieva, K. (2019, October 8). Decelerating Growth Calls for Accelerating Action. International Monetary Fund, 2019 Annual Meetings Curtain Raiser Speech. Retrieved from:

4 Silverblatt, H. (2019, October 3). Market Attributes: U.S. Equities September 2019. S&P Dow Jones Indices Market Attributes®. Retrieved from:

5 Butters, J. (2019, October 7). S&P 500 Will Likely Report Year-Over-Year Decline In Earnings In Q3. FactSet Research Systems Inc. Retrieved from:

Sources for Market Data:

Dow Jones Industrial Average:                                                                                                                                                                                                

S&P 500:                                                                                                                                                                                                                                        


10-Year TIPS:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

U.S. 10-Year Treasury Note:

Investment advisory services are offered through BCJ Capital Management, LLC., an SEC Registered Investment Adviser. Information presented is for educational purposes only. It should not be considered specific investment advice, does not take into consideration your specific situation, and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment strategies. Investments involve risk and are not guaranteed, and past performance is no guarantee of future results. For specific tax advice on any strategy, consult with a qualified tax professional before implementing any strategy discussed herein. BCJ FG 19-152

You Might Also Like