Introduction

Markets were turbulent in the third quarter, but the key thematic elements have not changed. Weak or decelerating growth in virtually every major economy, coupled with overhangs from international trade frictions, have compelled the major central banks to retain stimulative policies for the foreseeable future.

The year-to-date rally in stocks has largely been driven by multiple expansion, which in turn, has been driven by central banks’ pivot towards lower interest rates. The big question now seems to be whether this dynamic can continue. Despite new rounds of monetary accommodation, stock prices failed to increase further, suggesting that valuations are full. We are increasingly cautious as economic fundamentals are still weak, and yet market performance has been overly reliant on monetary accommodation.

Market Update

Following the temporary truce struck between President Trump and President Xi at the G20 summit in June, the U.S. and China restarted trade negotiations. But afterward, President Trump surprised with an announcement of new tariffs on the last $300 billion worth of Chinese goods that had not already been impacted. Tariffs on a portion of these already took effect in the beginning of September, while tariffs on the remainder, which consists mostly of consumer goods such as personal electronics and apparel, will be delayed until the middle of December. China retaliated by announcing new tariffs on $75 billion worth of U.S. goods implemented under the same timelines. Currency, too, has emerged as a battleground between the U.S. and China. The yuan fell to a 10-year low against the dollar, and the U.S. Treasury designated China as a currency manipulator. A weaker currency makes Chinese goods cheaper and defrays the impact that U.S. tariffs have on Chinese export demand.

U.S. economic growth is still the fastest of the large developed economies, but it is moderating. Recently, consumer spending has been especially strong, and it has offset the drag from declining exports, inventory purchases, and fixed investments. This latter set is likely reflecting the impact of global trade tensions and the lapping of prior benefits gained from the reduction in corporate tax rates and stockpiling ahead of tariffs. Gross Domestic Product (GDP) increased 2.0% in the second quarter, compared to an increase of 3.1% in the first quarter and 2.9% in 2018.