Highlights of the Third Quarter Review:
- Reserve your seat today for one of the upcoming Social Security Workshops.
- Look for the Special Days coming in October.
- Markets drop in the quarter along with commodities. Interest rates move lower.
- Opportunities arise in recent market decline-keep focus on long term goals/plans.
- China and the FED dominate the Quarter’s headlines.
READ ON FOR FURTHER DETAILS……………………………
Upcoming Social Security Workshops Offered
We continue to offer workshops covering Social Security details, including when, how, and your options for benefits that can last the rest of your life. There are several options many individuals are not even aware exist. There are still seats available at the following sessions:
Tuesday, October 6th: 3:00-4:00pm
Tuesday, October 20th: 11:00am-12:00 Noon
Thursday, October 29th: 1:00-2:00pm
These workshops will be held in our office conference room. Call us today at 405-844-9826 to reserve your seat today. Feel free to bring a friend or family member with you that could benefit from this valuable information.
October Special Days Ahead
The month of October is Breast Cancer Awareness month as well as Financial Planning Month.
October 4-10: Fire Prevention Week
October 5th: National Golf Day
October 11th: Clergy Appreciation Day
The third quarter produced both volatility and negative results for most major global stock indices. The Dow Jones Industrial Average gave up 7.58% for the three months ending September 30th, and was down 8.63% for 2015. The Standard & Poor’s 500 stock index dropped 6.94% in the third quarter, making it 6.75% lower year-to-date.(MarketWatch)
See the above chart for a better perspective of the recent market drop looking at the various market declines since October of 2007.
Commodity prices continued their decline, with the price for West Texas Intermediate Crude oil falling $14.57 per barrel, ending September at $45.34, while gold dropped $57.00 per ounce, finishing the quarter at $1,114.00. (CNBC, St. Louis Federal Reserve)
Interest rates fell in light of lower stock and commodity prices, with the yield for the 10 year U.S. Treasury falling to 2.06%. (U.S. Treasury) The national average rate for a 30 year fixed mortgage ended last week at 3.81% and the 15 year fixed rate was 2.89%. (Bankrate.com)
Let’s look at some stock market history to put the current market decline in cont
Despite the current losses in the U.S. stock market, a new study shows a clear trend of favorable annual returns in the past 89 years. From 1926 to 2015, investors have seen 65 years of positive annual returns compared to 24 years of negative annual returns, reports Abbott Associates. Further, averages for positive annual returns (21.47%) have topped negative annual returns (-14.29%).
The volatility that was experienced this past quarter has not been seen since 2011. We have to ask ourselves, “Why?” Within the US economy, everything appears to be just fine. The economy is by no means witnessing robust growth, but it is still doing quite well, especially when compared globally. The service sector is doing very well, but the manufacturing and industrial industry is experiencing a decline.
When looking at the financial headlines, you most likely see more negative than positive news. We need to remember it is considered normal for equity markets to take 10% swings annually, but the media seems to forget this in the heat of the moment. This leads us to the conclusion most of the recent volatility has come out of temporary fear or panic without regard to the bigger, long-term picture. Markets rarely move in straight lines and we anticipate this time to be no different. It can take volatile markets several months to calm down before deciding which direction to move next. At this time we anticipate the longer term direction to be decided by year end or possibly sometime in the first quarter of next year.
For the twelve months ahead we remain fairly optimistic, especially for equities in general. We continue to invest portfolios based on each specific risk level, keeping in mind our client’s long-term goals. We can’t let short-term volatility impact these decisions. Most portfolios are primarily exposed to individual stock names chosen based on various value and fundamental metrics. We believe this will bode well in the months to come, even if the market continues to give us a wild ride.
If the broader markets do regain their strength and rally in the months ahead, it should give the Fed comfort to begin raising rates soon. Historically, high yield and bank loan fixed income assets perform best under economic growth and rising interest rate environments. Energy prices have contributed to higher yield spreads in junk bonds and in turn has negatively impacted their performance, which may also begin weighing more heavily on energy concentrated states such as Oklahoma and Texas.
Looking at the nation as a whole, lower energy prices have typically been a net-positive for consumers. But it must be noted that the US is a great deal more energy independent now than in the past, which may cause less of a benefit to be immediately realized. The biotech sector has also seen more volatility, which has brought some opportunities to the forefront. With each swing, values rapidly change, and we are constantly determining if there are better investments to be made and adjusting portfolios as needed.
What does all of this mean?
Time to get practical and extract ourselves from the numbers. What we’ve provided is a longer term review of S&P 500 stock returns and volatility that surround the average annual returns. Some investors would easily look past such volatility while others would experience sleepless nights at the thought of their portfolio losing value in one calendar year, even if the odds are low.
Only you know how you will react. That’s why we have five different portfolio risk levels and recommend a diversified portfolio in which we hold more than just one class of assets.
Benjamin Graham, known as the “Father of Value Investing” and a favorite of Warren Buffett, once quipped, “Individuals who cannot master their emotions are ill-suited to profit from the investment process.” Diversification and an investment roadmap that takes the emotions out of the investment equation have typically been the surest path to financial success.
Much of the third quarter was dominated by two events – China’s troubles and the possibility the Fed would boost its key lending rate for the first time in almost 10 years. It didn’t.
Despite China’s size, the U.S. economy doesn’t depend on sales to China for its growth and neither do many of our major trading partners (Wall Street Journal). U.S. exports to the Asian economy make up less than 1% of U.S. GDP. “If China disappeared from the map,” said Paul Ashworth, an economist for Capital Economics, U.S. GDP growth would fall by about 1 percentage point. “That’s not even a recession (Wall Street Journal).” Of course, China isn’t going to fall off the map, but even if Chinese growth completely stalled, there would likely be only a minimal impact here at home.
So what’s the big deal about China?
The Asian giant’s contribution the worldwide economy has been in basic commodities. In its quest to build mega cities and a major industrial infrastructure, the country absorbed an enormous amount of the world’s resources. But that is about it, according to David Rosenberg, chief economist and strategist at Gluskin Sheff. However, smaller countries that are dependent on the sale of raw materials, and companies that are in the mining sector are feeling the pain. According to the UN Conference on Trade and Development, 94 developing countries depended on commodities for more than 60 percent of their merchandise export revenues in 2012/13 (Reuters). See chart below.
When Japan’s economy hit the skids in the 1990s, there were similar anxieties the global economy might stumble. At the time, Japan was the world’s number two economy. Although Japan made up a larger share of the global GDP at its peak than China does, the U.S. economy side-stepped Japanese weakness. In fact, troubles in Japan continue to this day, and they haven’t done much to depress the global economy.
The Fed blinks
The Federal Reserve has held its key lending rate, the fed funds rate, at near zero for almost 10 years. It really does want to start raising interest rates amid concerns that low rates may eventually create financial bubbles. Reason – consumers and businesses may increasingly base buying, lending, and investment decisions on artificially low interest rates.
In addition, we will eventually slip into a recession. Free market economies always do. And when that happens, the Fed would like to have the ability to administer traditional monetary medicine (cutting the fed funds rate) to combat a slumping economy. If rates are still near zero, it loses a key weapon in its arsenal that it has used for decades to combat recessions.
Investors with a very short-term time horizon interpreted the outcome as a vote of ‘no confidence’ by the Fed in the global economy, creating additional short-term volatility. While an ultra-accommodative monetary policy in the form of low interest rates is normally viewed as favorable for stocks, it loses its punch when investors sour on the economic outlook.
Maybe “liftoff” will occur at the end-of-October meeting or at the December meeting. But international woes in China and emerging markets aren’t going away anytime soon. Taking a broader view, will it really matter to long-term investors whether the Fed hikes in October or December, next year, or five years from now? Probably not.
Have a great week ahead and we encourage you to call us anytime we can be of further service, or if you have any questions or concerns. We appreciate the privilege to be of service. Some closing quotes to start your week:
“Always borrow money from a pessimist. He doesn’t expect to be paid back.”—Anonymous
“Intaxication: Euphoria at getting a refund from the IRS, which lasts until you realize it was your money to start with.”—From a Washington Post Word Contest
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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 New York Mercantile Exchange front-month contract; Prices can and do vary; past performance does not guarantee future results.
6 London Bullion Market Association; gold fixing pricing at 3 p.m. London time; Prices can and do vary; past performance does not guarantee future results.