After setting an all-time record July 26 when it was up 21% for the year, the S&P 500 fell 2% from that high by quarter-end, mainly due to continuing trade tensions with China and slowing global growth.

As a result, stock-market gains for the third quarter were mixed. The S&P 500 gained 1.7%, but three other stock indices all suffered small third-quarter losses. The tech-heavy NASDAQ declined 1.4%, small companies fell 1.5% and international stocks lost 1.6%.

President Trump’s trade showdown with China continues to affect stock market results. For example, when it was announced Sept. 20 that the Chinese Vice-Minister of Trade and his delegation had cancelled their visit to Montana – presumably to announce increased buying of U.S. farm products – the Dow fell nearly 300 points from its mid-day high.

Conversely, when it was revealed last Monday that the Chinese would come to Washington Oct. 14-15 to resume trade talks, the Dow gained 0.5% that day. (U.S.-Chinese trade tumbled 14% for the first eight months of 2019, compared with the same period for 2018).

Certainly, economies worldwide are now growing more slowly than in 2018. After 2.9% U.S. GDP growth last year, 3.1% for this year’s first quarter and 2% for 2019’s second quarter, Vanguard is predicting an average of only 1.7% for this year’s last two quarters.

Forecasts for Eurozone growth this year are even lower. They average below 1% — a miniscule 0.8 % for 2019. Germany, Europe’s largest and most important economy, grew only 0.4% for the 12 months ending June 30 after a 0.3% decline for the second quarter. If the Germans report a third-quarter downturn later this month, then their economy will officially be in recession. (The accepted definition of a recession is two negative quarters in a row.)

Given the slowing global economy and that the U.S. is now setting an all-time record (currently 10 years, three months) without a recession, predictions for a coming downturn are becoming much more numerous.

The most negative forecast I have seen is by Jeffrey Gundlach, billionaire investor and CEO of the mutual-fund firm DoubleLine, who is predicting a recession before the presidential election next year. A Stanford University survey last month of 225 chief financial officers revealed their most negative assessment of the U.S. economy in three years – 53% believe there will be a recession by 2021.

I tend to discount recession predictions but do agree with Vanguard’s outlook issued last month that argued: “The risk of of a global or a major regional recession is not Vanguard’s base case, but it is more elevated than usual.”

Since 1930, we’ve had 14 recessions (1930-32 is called a depression, stocks fell 89% from their high), an average of one every 6½ years. However, since 1983 we’ve had only three recessions – one every 12 years! But the 2001-02 and the 2007-09 recessions were the two worst ones since the 1930s, causing the stock market to plunge 49% and 56%, respectively.

It’s difficult for me to foresee a recession given strong consumer spending, almost 70% of the economy. However, the Confidence Board’s Consumer Confidence fell from 134 in August to 125 in September, nearly a 7% decline. (The neutral number is 100, meaning no growth or decline. The all-time record is 142 in 1999; a recession began in April 2001.

Certainly both economic and political uncertainty are worries that are impacting economic growth. I urge readers to go online to read John Hood’s column in the

Sept. 29 Winston-Salem Journal: “Uncertain policy has economic cost.” Hood writes: “When people can’t predict with at least some degree of confidence what economic policies their government will follow, they often delay consequential decisions and often park their money in safe, lower yielding investments.”

The Fed’s response to economic uncertainty and to make a recession less likely was to lower interest rates twice last quarter – one quarter of 1% in both July and September. President Trump wanted far deeper cuts – tweeting that Fed Head Jerome Powell had “no guts” and that he was a “bonehead.” Jamie Dimon, the respected CEO of J.P. Morgan Chase, responded that he thought Powell was “a quality human being.”

Lower interest rates are good for the economy and should help avoid a recession. On Aug. 15, for the first time ever, the 30-year U.S. Treasury Bond yield fell below 2%; it finished the quarter at 2.12%. Bond prices rally when interest rates drop – the Fidelity Total Bond Market fund was up 2% for the third quarter and 9% for the year. (Through Sept. 30, the S&P 500 has gained 19% this year.)

My biggest worry is the worldwide manufacturing slowdown. China’s industrial expansion is the lowest in 30 years and Germany’s industrial expectations outlook is the worst since 2009. Here at home, the ISM manufacturing Purchase Managers Index, reported Oct. 1, declined 22% from 61 last December to 47.8 in September (50 is neutral). The number for new export orders was only 41.

Both readings were the lowest since 2009, the major reason the Dow plunged 838 points Tuesday and Wednesday, a little more than 3%. A ruling Wednesday by the World Trade Organization that the Eurozone illegally aided Airbus also contributed to the sell-off because it gave the U.S. permission to impose $7.5 billion of tariffs later this month on European imports.

I’m somewhat surprised that the stock market held up as well as it did last quarter. Maybe it’s logical given the lowest unemployment rate in 50 years, far more advertised job openings than the number of people unemployed, strong real estate sales, solid new car purchases, and low interest rates and energy prices.

Fourth quarters are typically the best for U.S. stocks, averaging 4.7% for the past 25 years. If a trade agreement is reached with China, fourth-quarter returns could double that average.

Politically, during Clinton’s impeachment inquiry the market rallied 28% while during Nixon’s it dropped 15%.

Peter Lynch, the best mutual-fund manager ever who averaged 29% a year at Fidelity Magellan from 1977-1990, once advised: “The key to making money in stocks is not to get scared out of them.” As usual, Sue’s and my stock portfolios are fully invested.

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