Q2 2019 Market ChartBook

Q3 2019 Market ChartBook

Baird Private Wealth Management

September 30, 2019

Wealth Management | Capital Markets ? Investment Banking | Private Equity | Asset Management

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Table of Contents

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22

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Economy & Markets

Market Highlights Markets at a Glance Returns by Asset Class S&P 500 Index Economic Growth Inflation Watch Jobs Market Corporate Profitability Market Volatility Commodity Markets Mutual Fund and ETF Flows

Domestic Equity

Equity Snapshot Asset Class Performance Sector Performance Investment Style Leadership Historical Market Valuations Mutual Fund Performance

International Equity

Global Performance Map Equity Snapshot Country Performance Sector Performance Investment Style Leadership Global Market Valuations Historical Market Valuations

Fixed Income

Bond Market Snapshot Maturity/Credit Performance Yield and Volatility U.S. Treasury Bonds Municipal Bonds Corporate Bond Yields Bonds Spreads Sector Yields & Returns Mutual Fund Performance

Economy and Markets

Q3 2019 Market ChartBook

Q3 2019 Market Highlights

Economy and Market

At a Glance: Equity markets ended the quarter in mostly positive territory despite mixed economic data and a continuation of trade tensions. The S&P 500 returned 1.7% in Q3 for a YTD total return of 20.6%. Once again, the US outperformed international equities as the USD strengthened. Investors also sought the safety of long-term bonds with the Bloomberg Barclays US Agg 10+ Yr rallying 6.6% in Q3 and 20.9% YTD. The Fed showed its commitment to addressing a possible slowdown by cutting rates twice this quarter. Despite these cuts, the yield curve remains inverted, indicating a higher probability of recession.

Economy: The US economy grew at a slow and steady rate of 2% in Q2. Weak exports and business investment weighed on growth even as consumer spending had its strongest quarter in nearly five years. With unemployment near historic lows at 3.7%, the US consumer has been resilient this year though consumer confidence has dropped recently. Concerns remain about the strength of the economy as the ISM US Manufacturing PMI Index slipped to its lowest level since 2009.

Fed Speak: As market participants expected, the US Federal Reserve cut interest rates in Q3 for the first time in over a decade. Following the two quarter point rate cuts last quarter, the FOMC's target federal funds range is currently between 1.75%-2.00%. The rate reductions were driven by the global slowdown and trade turmoil. Chair Powell indicated these cuts were a "mid-cycle adjustment" rather than a trend for the future. FOMC members are divided on whether further cuts are warranted even though the market is indicating a greater than 75% chance of another rate cut in October.

Domestic Equity

Market Cap and Style: Returns were mixed this quarter. Size played a significant role in performance, with the Russell Top 200 (+1.8%) outperforming the Russell Micro-Cap (-5.5%) by over 7% in Q3. Within Large-Cap, Growth and Value performed roughly inline with each other, but the same was not true for smaller companies. Within Small- and Mid-Cap sized companies, Value outperformed Growth by 3.6% and 1.9% respectively. On the year, Mid-Cap Growth was the best performing style with a 25.2% return while Micro-Cap lagged with just a 7.9% rise YTD.

Sector: US Equity markets were decidedly defensive in Q3, with strong returns from Utilities (+9.3%) and Consumer Staples (+6.1%). Low interest rates also drove the rally in the Real Estate sector (+7.7%). Energy stocks bounced around along with oil prices and ended up being the worst performing sector for the second quarter in a row with a decline of 6.3%. On the year, Information Technology remains the strongest performer with a 31% return.

International Equity

At a Glance: International equities struggled in Q3. Developed markets fell 1% and emerging markets slumped 4.3%. The strong US dollar knocked off 2% of returns for both the MSCI EAFE and MSCI EM benchmarks. Within developed markets, Japan (+3.1%) was the best performer while Hong Kong slumped 12% as protests took their toll on the economy. German markets also dropped 4% as disappointing economic data persisted. Within EM, Taiwan posted the lone positive return of 5.2%, driven by Taiwan Semiconductor. South Africa dropped 12.6% as the country faces prolonged geopolitical and economic trouble.

Fixed Income

At a Glance: The broad US bond market, as measured by the Bloomberg Barclays US Agg Index, returned 2.3% to investors as risk sentiment continued on its roller coaster. Following the Fed's "hawkish cut" in late July, US interest rates turned sharply lower as trade tensions heightened and global growth forecasts fell. These concerns led to significant demand for high quality fixed income assets. Demand for US Treasuries pushed rates to levels not seen since 2016. The 10-Year Treasury Yield ended the quarter at 1.66%, falling 34 bps in Q3. During the 3rd quarter, the market's attention was directed back to the 3-Month/10-Year Spread, which first inverted back in March and remains inverted at minus 20bps. Investors will be keeping a watchful eye on this inversion as it has been an accurate predictor of recessionary concerns on the horizon.

Taxable Bonds: Supported by solid consumer data, US recession fears were alleviated somewhat and investors demanded corporate credit. Investment grade and high yield corporates delivered solid returns in Q3, gaining 3.1% and 1.2% respectively. Given the downward trend in rates, US Treasuries, which come with a hefty duration profile, returned 2.4%. Laggards for the quarter included Asian bonds (0.0%), European fixed income (-1.6%), and high yield corporates rated CCC or below (-2.3%). As risks for a lower growth forecast mounted, spreads for riskier securities widened, pushing prices lower.

Municipal Bonds: Municipal bonds rose 1.6% in Q3, underperforming its taxable peers by 69 bps. Strong technicals and encouraging fundamentals supported the positive performance. Taxable municipal bonds was the top performing sector increasing 3.4%, while pre-refunded municipal bonds suffered, only up 0.4% in Q3.

Robert W. Baird & Co. Member SIPC.

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Markets at a Glance

As of September 30, 2019

Asset Class

U.S. Stocks Large Cap Large Cap Value Large Cap Grow th Mid Cap Small Cap

International Stocks Developed Markets Emerging Markets

Bonds Short-Term Taxable Intermediate-Term Taxable Short-Term Municipal Intermediate-Term Municipal

Cas h Cash/Cash Equivalents

Sate llite High Yield Real Estate Commodities

QTD

YTD

Trailing Returns (%)

1-Ye ar

3-Ye ar

5-Ye ar

10-Ye ar

Annual Returns (%)

2018

2017

2016

Benchm ark

1.4

20.5

3.9

13.2

10.6

13.2

(4.8)

21.7

12.1 Russell 1000?

1.4

17.8

4.0

9.4

7.8

11.5

(8.3)

13.7

17.3 Russell 1000? Value

1.5

23.3

3.7

16.9

13.4

14.9

(1.5)

30.2

7.1 Russell 1000? Growth

0.5

21.9

3.2

10.7

9.1

13.1

(9.1)

18.5

13.8 Russell Midcap?

(2.4)

14.2

(8.9)

8.2

8.2

11.2

(11.0)

14.6

21.3 Russell 2000?

(1.1)

12.8

(1.3)

6.5

3.3

4.9

(13.8)

25.0

1.0 MSCI EAFE (Net)

(4.2)

5.9

(2.0)

6.0

2.3

3.4

(14.6)

37.3

11.2 MSCI Emerging Mkts (Net)

0.7

3.4

4.6

1.8

1.6

1.5

1.6

0.8

1.3 BBgBarc 1-3 Yr Govt/Credit

1.4

6.4

8.2

2.4

2.7

3.0

0.9

2.1

2.1 BBgBarc Intermed. Govt/Credit

0.3

2.1

3.0

1.5

1.2

1.3

1.8

1.1

0.2 BBgBarc 1-3 Yr Municipal

1.0

5.7

7.9

2.7

3.1

3.8

1.7

4.5

(0.5) BBgBarc 7 Yr Municipal

0.6

1.8

2.4

1.5

1.0

0.5

1.9

0.8

0.3 FTSE 3 Month T-bills

1.3

11.4

6.4

6.1

5.4

7.9

(2.1)

7.5

17.1 BBgBarc US Corporate High Yield

7.3

27.9

20.3

9.3

10.7

12.8

(4.0)

9.8

7.6 DJ US REIT

(1.8)

3.1

(6.6)

(1.5)

(7.2)

(4.3)

(11.2)

1.7

11.8 Bloomberg Commodity

Source: Morningstar Direct; Russell, MSCI, Bloomberg, Barclays, FTSE, and Dow Jones benchmarks. Performance greater than one year is annualized. Performance is represented by the benchmark listed in the "representative benchmark" column. See important disclosures and definitions included with this publication.

Robert W. Baird & Co. Member SIPC.

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