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Third Quarter, 2014 Review and Outlook

By October 2, 2014September 16th, 2023No Comments

Highlights of this Quarter’s Update:

  1. Markets weaken in September and start the fourth quarter on a down note.
  2. There still has not been a 5% decline in the major stock indices this year through October 1st.
  3. Global Events have not yet had a major impact on U.S. financial markets.
  4. The Dollar surges against the Euro and Yen, reaching the highest level since 2010.
  5. We continue underweight in stocks with a view the stock markets in general are overvalued.
  6. Our view is for interest rates to remain stable or ease lower in the fourth quarter.
  7. Call TODAY to schedule your personal review and year-end planning session.
  8. I.G. has implemented a new interactive financial planning/management program now available to all current clients. We think you will find this one of the best money management tools available today and we want to get you set-up on it as soon as possible.

The Markets:

If you’ve had one eye on your daily routine and the other on your favorite Internet news website or 24-hour cable news channel over the past three months, you’d know there are plenty of hotspots around the globe.  There’s the Ukraine/Russia crisis, ISIS and U.S. intervention in Iraq and Syria, the spread of the Ebola virus, lingering anxieties that Putin’s Russia has designs on the Baltic States (NATO members), and protests in Hong Kong, a major financial center.

September saw the major U.S. stock indices, as well as commodity prices and bond prices all decline as the third quarter came to an end.  The drop in stocks continued on October 1st to start the fourth quarter, but both bonds and commodities rose for the day.  From the high of the Dow reached on 09/19/14, it has now declined 2.7% through October 1st, and is up 1.98% for the year.  The S&P 500 has dropped 3.2% from its September 18th high through the market close on October 1st and is up 5.7% for the year.  We have still not seen a 5% drop and that would be normal periodically during most market cycles.  (Google Finance)

Currently, the collective wisdom of the market doesn’t seem to believe the many global problems we are witnessing will have a material impact on the U.S. economy.  Simply put, the market is currently saying that what’s going on in Ukraine, the Middle East, and Hong Kong won’t affect longer term buying decisions of U.S. businesses and consumers? If it does not, it keeps the U.S. economy in an upward trend, which supports corporate earnings.

To a lesser extent, will it impact exports or earnings of multinationals that do a large chunk of business overseas? There are likely to be anecdotal examples of firms that will run into stiff headwinds from foreign operations, and economic weakness in Europe quickly comes to mind.  Yet, figure 1 highlights that two-thirds of U.S. revenue exposure for the larger S&P 500 firms originates in North America.


*Revenue exposure includes U.S. exports and sales of goods produced and sold overseas

The Dollar ascends to the throne

A nation’s currency is typically a rough barometer of economic strength or weakness. Recently, the dollar has been flexing its muscle. The Dollar Index6, which is a weighted average of the currencies of major U.S. trading partners, rose to its highest level since July 2010 – see Figure 2.


In the meantime, economic growth in Europe has languished (Bloomberg, Eurostat, Wall Street Journal), and  we’re seeing uneven economic activity in Japan, which has led to increased talk from economists that the Bank of Japan could expand its massive stimulus program (Wall Street Journal).

 Our Outlook and Portfolio Update

Sam N. Jurrens, CFA, CFP®



For the year, portfolios have performed quite well for their given levels of risk. The current downturn in most portfolios can be specifically pinpointed to the month of September. Most asset classes posted negative returns for the month. The greatest weakness was seen in alternative assets, such as commodities, precious metals, and real estate. Within equities, small-cap stocks have performed the worst this year, which portfolios have very little to no exposure. Dividend related stocks also saw a downturn, since interest rates moved slightly higher mid-month.

This move in interest rates also adversely affected our bond funds. Within our fixed income holdings, international bonds moved lower in September, primarily due to the surge in the US Dollar and drop in the Euro. One factor contributing to this major move in currencies was the ECB’s June announcement to lower rates and once again initiate more QE programs at some point in the future. This comes at a time when the US is attempting to eliminate their programs. The market has interpreted this as bullish for the Dollar, bearish for the Euro, which in turn adversely impacted our international bonds. This temporary surge in the dollar also contributed to the poor performance of commodities as a whole.


Our strategy continues to be underweight equities compared to normal standards, by only utilizing

our stock models for limited equity exposure. These models target individual stocks based on the specific risk of the portfolio. Observing almost every long-term historical valuation measurement, stocks as a whole appear rather expensive, which is why we remain underweight the asset class. We stand ready to become defensive on equities if conditions warrant. In the meantime, we will simply remain underweight stocks, while general valuations seem high. However, expensive markets have the ability to become even more expensive, which is why we must only be cautious rather than immediately defensive.  If our strategy pushes us into a more defensive mode, we will be doing so to protect portfolios from a longer-term trend rather than attempting to avoid only short-term volatility that poses no extended risk.

We look to our current investments in the fixed income and alternatives space to outperform in the year ahead, and to help offset any potential negative movements in our below normal equity exposure.

Overall economic trends still remain positive. Employment and other indicators show no signs of an imminent recession. One of the largest risks remaining is if the Fed would raise rates substantially sooner than expected.  The majority of “risk” held in portfolios is assumed through more aggressive fixed income assets, such as high yield and corporate bonds. These assets will be substituted for more conservative investments if spreads begin to tighten further than normal. For the fourth quarter, we expect stable to declining interest rates, contrary to the consensus view.

Review Time:

It’s a great time of year to call and schedule your personal review as we move into the fourth quarter.  It is one of the best times to start planning for next year and to take time to see if anything should be done before year-end.  We have implemented a new interactive financial planning/management program that is now available to all of you and we would like to be sure you are set-up on the platform by year-end.  Call us today to schedule your personal review-either in person or by phone.

God Bless,

Your TEAM at F.I.G. Financial Advisory Services, Inc.


1 The Dow Jones Industrials Average is an unmanaged index of 30 major companies which cannot be invested into directly.  Past performance does not guarantee future results.

3 The S&P 500 Index is an unmanaged index of 500 larger companies which cannot be invested into directly.  Past performance does not guarantee future results.

5 London Bullion Market Association; gold fixing pricing at 3 p.m. London time; 2012/2013 year-end price fixing at 10:30 a.m. London time; Prices can and do vary; past performance does not guarantee future results.

6 The Dollar Index is an unmanaged index that is made up of a weighted average of the currencies of the major U.S. trading partners. The index cannot be invested into directly. Past performance does not guarantee future results.

It is important that you do not use this e-mail to request or authorize the purchase or sale of any security or commodity, or to request any other transactions. Any such request, orders or instructions will not be accepted and will not be processed.

All items discussed in this report are for informational purposes only, are not advice of any kind, and are not intended as a solicitation to buy, hold, or sell any securities. Nothing contained herein constitutes tax, legal, insurance, or investment advice.

Stocks and bonds and commodities are not FDIC insured and can fall in value, and any investment information, securities and commodities mentioned in this report may not be suitable for everyone.

U.S. Treasury bonds and Treasury bills are guaranteed by the U.S. government and, if held to maturity, offer a fixed rate of return and guaranteed principal value. U.S. government bonds are issued and guaranteed as to the timely payment of principal and interest by the federal government. Treasury bills are certificates reflecting short-term (less than one year) obligations of the U.S. government.

Past performance is not a guarantee of future performance. Different investments involve different degrees of risk, and there can be no assurance that the future performance of any investment, security, commodity or investment strategy that is referenced will be profitable or be suitable for your portfolio.

The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.

Before making any investments or making any type of investment decision, please consult with your financial advisor and determine how a security may fit into your investment portfolio, how a decision may affect your financial position and how it may impact your financial goals.

All opinions are subject to change without notice in response to changing market and/or economic conditions.

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