Global financial markets continue their holding pattern near all-time market highs with major indices ending the quarter close to where they started. A tug-of-war is at work, with the trade war, slowing growth, and escalating geo-political tensions offsetting interest rate cuts by the Fed. The Fed is split between those advocating for more ‘insurance’ cuts to bolster the economy versus others who see recession fears as overblown and prefer to save their ‘firepower’. The Saudi oil attack and, most recently, the US whistleblower complaint have shifted the market’s attention yet again, further contributing to an already uncertain global outlook. We remain vigilant as we enter the fourth quarter.
Amidst the sensational headlines, we have been monitoring the hard data and evaluating the implications for portfolios. One conclusion is that the tit-for-tat nature of the trade war has kept businesses on edge and is showing up in the form of lower investment and capital spending across many areas of the economy. Sectors most exposed to global trade, such as manufacturing and transportation, have started reporting weaker earnings as a result. Despite this weakness, the consumer continues to thrive amid rising wages and low unemployment, creating strong results for retailers (see our local bellwether Walmart). What remains to be seen is whether potential tariff-driven higher prices put a strain on the consumer during the holiday season.
In response to the evolving economic backdrop, we have been making strategic adjustments to portfolios reducing exposure in sectors more exposed to global trade while allocating capital to attractively priced, domestically oriented stocks. In addition to this repositioning, we have generated cash reserves to take advantage of opportunities as the market allows. We continue to monitor the Fed’s rationale for rate cuts, especially as a means to prop-up financial markets. With rates progressively getting closer to the zero bound, we will be monitoring the Fed’s use of other tools to ease monetary conditions. Prudence, patience, and a long-term focus govern our positioning.
We welcome any questions or comments you may have, and as always, thank you for your trust and confidence in our firm.
Brock Gearhart, CFA, President & CEO
Johann Komander, Director of Research