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Thomas R. Kiley
Chief Executive Officer
Great Lakes Advisors

The more things change the more they stay the same. In many ways, little has changed since we wrote last quarter’s economic overview. U.S. equities were mixed during the third quarter, with volatility increasing in response to U.S. and global growth concerns, and ongoing geopolitical tension (Iran, China, Brexit, Trump). September saw a nice bounce, with value stocks appearing to get a long-awaited bid.

In response to slower growth, particularly in the manufacturing sector, interest rates declined and flattened over the course of the quarter. The flattening yield curve led to the closely-watched 2/10 year spread inverting in August before finishing the quarter at 4 bps; the 30yr Treasury posted an all-time record low yield of 1.95% before advancing a bit higher. Trade tariffs and geopolitical issues once again caused economic indicators to fluctuate and the Fed has already delivered on the two rate cuts which were discounted at the start of the quarter; expectations for a third cut
have grown. This has breathed additional life into the housing market, where we have now established cycle highs in building permits, housing starts, and new home sales. A robust employment picture combined with an absence of inflation pressure made for high consumer confidence. Nothing has changed on those three fronts, with the possible exception of a wobble in the high consumer confidence number.

So while not much has radically changed with respect to the above, the economic picture and geopolitical risks have evolved. Most notably on the economic front, manufacturing has softened a good deal. Some of this may be attributable to tariff uncertainty. Regardless, U.S. Industrial Production is contracting, and the ISM Manufacturing Survey indicates the contraction will worsen. This means the U.S. is joining the rest of the developed world’s manufacturing contraction. In addition, the trade tensions with China remain. While investors appeared to begin discounting the President making a deal with China in order to mitigate chances of a 2020 recession, the President instead seems to be increasingly intrigued by the idea of restricting capital flows between the U.S. and China.

Iran appears to have been the culprit in the attack of the world’s largest oil and gas production facility (approximately 5% of global supply). This led to a quick, severe spike in oil prices, which was quickly unwound. And the Democrats have now launched the impeachment process against President Trump. We cannot know what type of revelations will result during the inquiry, but expect more noise in the financial markets.

Market Outlook
Central Banks around the globe are easing aggressively—in fact, as aggressively as they have since the Global Financial Crisis. Closer to home, we have seen two Fed rate cuts, and odds are we will see a third before 2019 ends. We now wait and see…can central bank policy help turn the tide?

If so, expect to see more of the high volatility/value rotation we saw in mid-September; if not, expect a modest pullback in the equity market, and continued outperformance by low volatility, short duration, ‘secular growth story’ stocks.