3 Trends to Watch in the Fourth Quarter

September 30, 2019

We began this year with the market expecting a recession because of three primary concerns: uncertainty surrounding the Federal Reserve’s interest rate decision, escalating U.S.-China trade tensions and deteriorating global growth.

However, the odds of a recession have lessened somewhat since then1 as stock markets rebounded substantially from the losses sustained in the fourth quarter of 2018.2

While the majority of the returns have likely already been captured in 2019, we believe there is still opportunity to earn positive returns in our equity portfolios through the remainder of the year. As we enter the fourth quarter, we are keeping our eye on three factors impacting the market:

1. U.S. dollar: Not too long ago, many investors were concerned that the U.S. dollar would fall out of favor when the International Monetary Fund (IMF) introduced the Chinese yuan to its basket of reserve currencies.3 Fortunately, this has not happened. The U.S. dollar continues to drive global decision-making and asset flows, and as such, has moved higher over the last five years.4 While this is welcome news for U.S. consumers, it has caused some issues for U.S. exporters, international assets and global economies that issue and repay debt in U.S. dollars. We will be closely watching the movement of the U.S. dollar moving forward as it affects our purchasing power and the returns of international assets.

2. U.S.-China trade negotiations: There have been costs to both the U.S. and China stemming from recent trade disputes. Recent reports show that U.S. manufacturing moved into contraction territory for the first time in three years5, and that China’s economy is slowing.6 For these reasons, it is still in both parties’ best interest to reach a resolution. The question is how long it will take to do so. The market looks like it is expecting measurable progress within a year, and though it would certainly applaud a speedier resolution, it also has room to decline if there are further delays.

3. Strength of the U.S. consumer: Unlike the government and corporations, the American consumer has refrained from carrying too much debt since the financial crisis.7 Instead, they have spent the last 10 years increasing their savings and improving their overall financial situation. This welcome consumer discipline has helped ward off serious recession threats and supported the stock market’s bull run. Throughout the rest of the year and into 2020, we will continue to monitor the health of the consumer. If consumer confidence and spending power remain strong, we will likely avoid a recession. If we see these measures decline, that may indicate a possible economic downturn on the horizon.

Despite this consumer strength, there has been a lot of investor concern about volatility over the last year. In this expansion cycle, we’ve seen an average of two to three pullbacks of 4 percent or more each year.8 So far in 2019, we have had two 6 to 7 percent pullbacks2, which is in line with historical averages.9 If history holds, we will likely see another single-digit pullback in the fourth quarter. However, these pullbacks should not influence our long-term investment strategies. It is this very same volatility that provides investors with the higher expected returns needed to grow their assets and purchasing power.


1. Seeking Alpha – Odds of U.S. recession before August 2020 rise to 1 in 10
2. Yahoo! Finance – S&P 500
3. Reuters – China’s yuan joins elite club of IMF reserve currencies
4. CNBC.com – The US dollar just hit a two-year high and is threatening to make another major milestone
5. CNBC.com – US manufacturing contracts for the first time in three years amid China trade war
6. CNBC.com – China’s economic growth may be looking at another rough quarter
7. CNBC.com – Consumers are America’s not so secret weapon to keep economy afloat, but they can’t save the world
8. Exencial Wealth Advisors research
9. CNBC.com – Grading the market: A routine pullback or has the trade war damned the S&P 500 to a trading range?

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