US Bond prices peaked in late August under the narrative that the US Federal Reserve will continue to lower rates and the discussion of negative rates in the US filled headlines. There was that inversion thing that showed up again for a few days. A full yield curve inversion never materialized. The depth and length of these inversions are not what we would call a signal of foreboding markets ahead. The fed has begun purchasing bonds again, but they said it is not Quantitative Easing this time. Same action; different label. Management of the narrative has worked at least for the near term as rates have come up/prices down a bit – but we are still in an almost parabolic move upwards in prices from the beginning of the year.
Municipal bonds are still favorable to taxable equivalents. Default rates are low and isolated to well-known places in the country. Many municipalities have benefited from credit upgrades (Connecticut, New Jersey). Even Chicago got an upgrade, but it is still a weak credit.
REITs continued their torrent pace in third quarter, with the index rising almost 8%, bringing the REIT index up 27.67% on the year through Q3 2019. The interest rate trend has been a friend. During Q3, US equities are were up slightly at 0.84%. Another example of the benefits of diversification. REITs have been mostly unaffected by China trade talk. Some might argue that REITs have been strong and will continue to be as this is one place that investors will come to for yield. After malls and shopping, REITs started off the year relatively strong, but the Q3 was a struggle, largely due to retail and e-commerce. The technology side of the REIT space (cell towers, data centers, cloud storage) continues to benefit from 5G build-out and e-commerce.
Overall, US equity markets continued to be strong in Q3 2019, as anytime weakness showed up it was short lived. It still feels like everyone is trying to find a reason the market can’t go higher – retail / individual investor sentiment remains very low. (AAII sentiment survey) We’ve been beating this drum for a while – it continues to be an unloved bull market. China trade, TPP, NAFTA, interest rates, Brexit, impeachment – yawn goes the bull. What is this telling us about US economic resilience?
If any markets are frothy, it is the US pre-IPO market pushing valuations to silly levels based on hipster or cultish leaders selling more of an idea or brand. It is good to see more companies going public now and we hope the pace continues to pick up.