2019 Q3 Market Review

Monday, October 14, 2019 6,244 views

The third quarter produced a script worthy of the best tear-jerking romantic novel. The U.S. and China couldn't resolve an ongoing trade tiff, political gridlock in the U.K. about Brexit and sliding manufacturing data in key developed markets contributed to a growing sense of economic malaise around the world. 

The U.S. Federal Reserve also cut short-term interest rates in the quarter, further pressuring investment-grade domestic bond fund yields.  

Trying to invest -- or, to be more precise trade -- on a dime in such murky geopolitical conditions proved to be quite a slippery slope in the latest completed quarter. Despite such doom and gloom in the news, domestic blue chip stocks as represented by the IFA U.S. Large Company Index ended Q3 with a positive return. At the same time, sister benchmarks covering domestic small caps and international equities fell into negative territory. 

It's an old story. Consider the interactive chart below showing IFA benchmark results of major asset classes covering the past 20 years. For example, if you went by past performance, the latest completed quarter would've produced even more market whiplash in terms of portfolio reckoning. 

If you click on the chart's "LC" button, you can see how bumpy of an investment path large cap stocks in the IFA index have had over smaller snapshots in time. Last year, it actually wound up down by 4%. A year earlier, it gained 22%. 

Other parts of the market, however, have been even more volatile over shorter stretches. Try selecting different IFA benchmarks in the chart to see just how faulty of a picture looking just at past performance provides in evaluating any strategic investment and wealth building planning process. 

Still, IFA's portfolio management and research team keeps up with shorter-term trends in stocks and bonds across the world. The takeaway from this year's Q3 is consistent with what we've found in past quarters, however. Instead of making any rash moves, IFA's advisors recommend their clients base any portfolio decisions on as large of a set of data as possible. (See the article "Advisor Alpha: The View from Vanguard.") 

Domestic Equities

In keeping with a general trend throughout 2019, large-cap domestic stock indexes continued to advance in the third quarter.  Total returns as represented in IFA indexes ranged from 1.70% for U.S. large-cap stocks and 1.99% for large-cap domestic growth equities to 0.71% for large value-styled stocks. 

But as might be expected, smaller-cap markets were more turbulent in the quarter. IFA's domestic index that blends different styles of small-cap equities lost 2.04% in Q3. (Notice in the chart below its small-cap growth benchmark did slightly worse.) Meanwhile, small-cap value stocks as measured by IFA's benchmark returned -1.19%. Overall, U.S. equities used in our indexes lost 0.56%. 

International (Developed) Equities

Outside of the U.S., stock markets generally turned south. IFA index returns from developed countries that are outside the United States all produced negative results in the third quarter of 2019. In Q3, returns included a loss of 2.52% for IFA's benchmark of large-cap value international equities and a drop of 0.55% for its benchmark of international small-cap value stocks. In total, international developed stocks that were constituents of IFA indexes slipped by an average of 1.52% in the quarter.

Emerging Markets Equities

Emerging Markets also finished in the red for IFA investors in the quarter. For Q3, these stocks included in IFA index returns lost 5.20% on average. Such returns ranged from -6.98% for our benchmark of developing markets value stocks and a fall of 4.75% by the IFA index of small-cap emerging markets stocks. 

Real Estate Equities

Global real estate was another example in Q3 of the broad benefits in sticking to a longer-term oriented investment plan and not reacting to short-term market gyrations. 

In the quarter, IFA's Global REIT Index returned 6.05%. That was a robust result compared to the previous quarter's 1.82% rise. On the year at the third quarter's close, this part of the market (as represented by IFA's benchmark) had gained 24.40%. 


In the third quarter, the 30-year U.S. Treasury rate decreased by 40 basis points while the five-year U.S. Treasury rate decreased by 21 basis points.

For Q3, the four different bond funds used by IFA all delivered positive returns. On the whole, these passive fixed-income funds generated an average return of 0.62% in the quarter. Those results ranged from a gain of 0.74% for the IFA Five-Year Global Fixed-Income Index to 0.51% for the IFA One-Year Short-Term Fixed-Income Index. 

In general, bond fund prices move inversely to interest rates. For example, when interest rates have increased, the price of existing bonds with a lower coupon rate usually can be expected to decrease so that new buyers of the bonds can get the same total return (capital gains plus interest) as that available from newly issued bonds at the higher rate and at similar risk. When interest rates decrease, the price of existing bonds typically move in the opposite direction and go up. 

IFA Index Portfolios

The returns of the IFA Index Portfolios are shown below net of the maximum annual 0.90% advisory fee through September 30, 2019. Reflecting mixed performances across indexes in equity and fixed-income categories in the third quarter, portfolios with a greater allocation to bonds produced better performance at the end of the third quarter. For example, the all-stock IFA Index Portfolio 100 lost 1.18% in Q3. The IFA Index Portfolio 20 (20% stocks and 80% bonds), though, returned a slight gain (0.05%) in the quarter. 

For the year, these portfolios remained on positive ground through three-quarters of 2019. The IFA Index Portfolio 100, for example, had generated a return of 11.54% by the end of September. The bond-heavy IFA Index Portfolio 20 still had a gain of 3.82% at the close of Q3. 

Given the recent underperformance in U.S. value stocks as compared to growth stocks in both large and small companies, some IFA clients may be wary about their tilt toward small and value companies. The chart below shows monthly rolling period returns of the IFA U.S. Small Cap Value Index versus the IFA U.S. Large Cap Growth Index for the last 50 years.

Over rolling one-month periods, it has been a toss-up between Large Cap Growth and Small Cap Value. But once we expand our view to longer time horizons, you can see that small value was the better index to own.

Each quarter, IFA monitors the funds they recommend for clients and as part of that process, we've developed a rating system. Below is a link to our Performance Monitoring Report for client portfolios: IFA Third Quarter 2019 IFA Client Performance Monitoring Report.

We've created the Investing Kit that includes a copy of "Index Funds: The 12-Step Recovery Program for Active Investors" book and documentary film based on the book, as well as the Galton Board, Stock Market Edition, which simulates the distribution of 600 monthly returns right before your very eyes.

This is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product or service. There is no guarantee investment strategies will be successful.  Investing involves risks, including possible loss of principal. IFA Index Portfolios are recommended based on time horizon and risk tolerance. Take the IFA Risk Capacity Survey (www.ifa.com/survey) to determine which portfolio captures the right mix of stock and bond funds best suited to you.  For more information about Index Fund Advisors, Inc, please review our brochure at https://www.adviserinfo.sec.gov/