Mark Lister, 2 October 2019

The September quarter was a solid one for shares in most regions, with lower interest rates offsetting ongoing trade tensions and signs of weaker economic growth. The local market was up 4.0 per cent, while US and Australian shares gained 1.2 and 2.4 per cent respectively.

A weaker NZ dollar also provided a strong tailwind for New Zealand investors, with the currency down against most major trading partners. This saw the return from US shares boosted to a very strong 8.5 per cent, and the return from the Australian market rise to 5.6 per cent.

The trade dispute between the US and China continued to ebb and flow during the quarter, and traders were kept on their toes trying to stay up to date with developments.

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Policy easing from central banks was also a dominant theme across financial markets. The Federal Reserve in the US cut interest rates twice, while the European Central Bank unveiled further stimulus measures in the hope of averting a recession, improving growth and getting inflation moving higher.

Closer to home, the Reserve Bank of New Zealand reduced the Official Cash Rate to 1.00 per cent, which is the lowest it’s ever been.

Economic releases pointed to a New Zealand economy that continues to slow, but remains generally solid with high commodity prices, low unemployment and steady migration providing support.

However, businesses are getting gloomier, which doesn't bode well for future growth. The ANZ Business Outlook survey saw headline confidence slump to weakest levels since April 2008 in September.

Looking ahead, the December quarter will be another busy one. Investors will be watching further trade talks, the looming Brexit deadline, another global earnings season, and some key central bank meetings.

The quarter will start with more trade negotiations between the US and China, with the next round of talks scheduled for October 10 and 11 in Washington DC.

The other side of the Atlantic will be in focus later in the month, with the UK scheduled to leave the European Union on Thursday 31 October. Prime Minister Boris Johnson has vowed to stick to this deadline, with or without a deal.

While it’s impossible to predict how this saga will play out, it seems likely the UK sharemarket and the British pound will have a volatile month.

The one-year countdown to both the presidential election in the US and New Zealand general election will also start during the quarter. The former is scheduled for 3 November 2020, while the last possible date for the latter is 21 November 2020.

Central banks will have their share of the limelight over the next few months, with expectations high for additional policy easing between now and the end of the year. The Reserve Bank of Australia cut its cash rate again on the first day of October, and investors expect similar moves from New Zealand and the US during the coming months.

While there are no shortage of challenges, the current quarter has seasonality on its side. Since 1950, the December quarter is traditionally the strongest of the year for US shares. The S&P 500 averages a gain of 3.9%, and is up 78% of the time.

While it makes for interesting discussion, this historic seasonality should be taken with a grain of salt. Last year, US shares fell 14.0% in the final three months of the year, the worst quarterly performance since September 2011.

Last but not least, the quarterly reporting season begins this month and this will allow investors to take the pulse of the world’s biggest companies.

Analysts expect it to be relatively uninspiring, with the S&P 500 in the US forecast to experience a 3.7 per cent decline in earnings, compared with the same period a year ago. This would make for the first time the index has reported three consecutive quarters of falling profits in more than three years.

It’s been a buoyant year for investors so far, with shares and fixed income both performing very strongly. We continue to see opportunities, but investors should be cognisant of the potential for volatility to reemerge as the tug of war between increasing risks and supportive central bank policy continues.