Based on the relatively mundane performance of U.S. stocks during the third quarter, one might be forgiven for thinking that not much went on between July and September. A quick scan of the headlines, however, reveals a multitude of crosscurrents. Geopolitics has kept journalists busy discussing the ongoing “trade war” between the U.S. and China. Throw in the bombing of Saudi Arabia’s biggest oil processing facility and news that the House of Representatives has started the ball rolling on potential impeachment proceedings and there’s plenty to talk about. Beneath it all, though, we think that the number-one issue for the market has been and will continue to be where the economy is headed.
The record-setting U.S. expansion that began in 2009 continues, though the economy has clearly slowed from the stimulus-driven level of 2.9% seen during 2018. At the same time, our work suggests that policymakers may have fewer tools at their disposal to combat slowing growth. For now, our base case does not include a U.S. recession in the near term. We do think the central tendency is for slower growth and a more challenging backdrop for profits. We see low interest rates as the new normal and believe the increased uncertainty could lead to higher volatility.