Monthly Markets Memo - October 2015
Equity Markets Perspective
Our perspective includes both bad news and good news. The bad news is that the Developed and Emerging equity markets continued to drop through the month of September which resulted in the worst quarter of equity performance since 2011. The good news is that through October 16th, many of these same markets have climbed over 4% from their September lows. The pullback that occurred in the 3rd quarter was mainly prompted by a slowing global economy.
Slowing global economic trends have had less of an effect on the U.S. economy due to lower reliance on exports, but those companies who do business abroad have had to fight not only this headwind but additionally the difficulty of competing with their international competitors who benefit from their cheaper currencies.
Having enjoyed six years of relatively steady gains across all kinds of financial sectors, some have been taken aback by the recent episode of market volatility. Yet volatility moves in both upward and downward directions and is part of the course for long-term equity investors. In fact, a willingness to endure the ups and downs of the markets is what allows an investor a potential higher compensation than the low coupon yields that many conservative bonds produce.
Global Economy Perspective
There is no doubt that the global economy has slowed, especially in the emerging markets. China’s desire to transition to a consumer led economy rather than one that relies on extensive infrastructure spending has put pressure on commodity prices which many emerging countries export. Due to the lower demand, the countries involved in this area have seen revenues drop significantly. China’s slowing is quite normal after such high growth for so many years. The combination of China’s slowing and other emerging market trends that were especially reliant on them for their growth has had a negative impact on the global economy.
In the U.S. economy, there is still plenty of reason to be optimistic. A recent jobless claim report came in at a 42-year low of 255,000. We also continue to see good activity in housing where home prices in many areas are now exceeding the prior high that occurred in 2006 and 2007. Auto sales activity continue to grow though still remaining below the average over the last 40 years.
Even with some slowing of the economy, we continue to see reason for long term investors to stay invested in equities including the low cost of credit, reasonable valuations and the loose monetary policies continuing in the Central Banks around the world. With this in mind and recognizing my tendency to convey to readers warnings of the volatility that should be expected, it should be noted that the areas that have the greatest amount of volatility tend to also be the areas that have the potential for larger reward. At this time, this theory describes many of the equity markets that are overseas. We continue to find good risk/reward opportunities in Europe and Japan. While the emerging markets are trading relatively cheaper we have concerns that the economic and markets uncertainty is too great for us to increase our holdings at this time. In addition, many of these markets have not responded well when the U.S. Fed has increased interest rates, which is considered normal, so we don’t see this as an opportune time to take advantage of these valuations. However, we will continue to monitor for actionable opportunities as the economic landscape changes.
Speaking of the U.S. Fed and rising interest rates, there is of course continued uncertainty around when the Fed will begin moving interest rates up. After indicating that they would begin tightening this year, there appears to be less certainty of this as they cited the slowing global economy as reason for pause. While we have hit the original unemployment target that they previously set as a potential catalyst to raise rates, the slow growth of inflation makes them cautious so they are willing to look at additional factors that could impede our economy. Whatever the short term effect any changes to the U.S. policy may have on the markets and economy, we continue to be cautiously optimistic about the overall global economy. This optimism is due to our belief that the U.S. will continue to provide a stable slow growing economy as well as the improvement seen in the other developed markets. The uncertain Chinese economy keeps us cautious however. Looking at the picture as a whole, we feel the global economy will keep moving forward.
Whoever brings blessing will be enriched, and one who waters will himself be watered.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendation for any individual. Although general strategies are revealed, this post is not intended nor does it reflect transactions within any one account. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All data and information is gathered from accurate sources but is not warranted to be correct, complete or accurate. Statistical data has been obtained from sources including but not limited to www.bea.gov, www.bls.gov and www.morningstar.com.