Highlights of this Quarter’s Update:
- The 4th quarter is here and the last opportunity to review and plan ahead for the balance of 2016.
- S. stock indices rise for the quarter, retaining positive results for 2916 to-date.
- Oil dips in the quarter, interest rates inch higher.
- Our portfolios fare well in the 3rd quarter relative to risk.
- Corporate earnings improve and positive outlook for the 4th
- Deutsche Bank in Germany creates uncertainty, but most likely will not be another “Lehman Bros”.
- S. economic fundamentals appear intact and no near term recession appears imminent.
READ ON FOR FURTHER DETAILS………………………………
Final Chance to Finish 2016 Strong:
The 4th quarter is the time for your final and last chance to review your financial plan for 2016 and make any adjustments that might be of benefit for you in 2016. Call us today to schedule your personal review, either in person or by phone and go over a 2016 “Last Chance Checklist” with us to be sure your overall financial plan is up-to-date and if any changes should be made between now and year-end. Call today!
The third quarter began on a very uneven footing. The U.K. had just surprised investors by voting to leave the European Union (E.U.), and markets were in the process of digesting an enormous amount of uncertainty and repricing shares in the face of that uncertainty. In reality, Brexit led to a two-day selloff in shares (St. Louis Federal Reserve). When cooler heads prevailed, the selloff was quickly followed by a rally in the S&P 500 Index and the Dow.
For the third quarter, the Dow Jones Industrial Average gained 2.11% and was up 5.07% for 2016 as of September 30th. The broader based S&P 500 gained 3.31% over the past three months, and is now 6.09% higher for 2016 as of the end of September. (MarketWatch)
Remember, when negative geopolitical or global events occur, they can create short-term selling pressures, as we’ve witnessed on several occasions. But if it does not impact the U.S. economic outlook, the event is usually discounted and investors tend to regain their composure.
Oil prices dropped during the quarter, with the price for a barrel of West Texas Intermediate Crude ending at $48.05 last Friday, down $2.15 since June 30th. (CNBC) Interest rates rose, and the yield for the 10 year U.S. Treasury ended the quarter at 1.60%, an increase of .11% since the end of the second quarter. (U.S. Treasury) Mortgage rates have stayed near lows, with the average rate for a 30 year fixed mortgage is 3.34%, while the 15 year fixed rate stood at 2.62%. (Bankrate.com)
It’s important to point out that we saw an unusual amount of complacency starting in mid-July. That complacency came to an end in September when talk surfaced of a potential rate increase at the Federal Reserve’s September 21 meeting. However, this is a very cautious Fed. It’s in no mood to surprise financial markets. While it signaled a rate hike this year is still very much a possibility, the Fed also paired back rate hike expectations in 2017 and 2018 (Federal Reserve Economic Projections).
Our portfolios fared well this past quarter relative to risk, and we are pleased with the overall net results. We have taken a stand within our fixed income/bond allocations, and favor short-term maturities in order to protect principal value in the event interest rates start rising moving forward. We also remain invested based on our anticipation of a favorable finish to 2016 for equities/stocks as well. We will keep you posted.
Let’s review the long-term driver of stocks – profits and profit expectations.
Figure 1 illustrates the earnings recession that began in the third quarter of 2015 and may extend into the third quarter of 2016. But it also highlights a forecast of a much better fourth quarter, which has played a significant role in supporting stock prices.
One European Bank:
Too big to fail isn’t just a topic here at home. It’s something European governments are also grappling with. While U.S. banks have done a much better job of raising capital, the same can’t be said of many of their European counterparts (CNBC, various sources).
At the end of June, the International Monetary Fund called Deutsche Bank (DB $13), Germany’s largest bank by assets and the fourth largest in Europe (Statista.com), the greatest risk to the global financial system (Wall Street Journal). Without diving into all the details, problems continue to bubble just under the surface with a bank that sports assets of just under $2 trillion.
Chances are this is not a “Lehman moment,” which is a reference to the disorderly 2008 failure of Lehman Brothers and the subsequent financial crisis. Knowing what we know today and knowing what happens when a large institution collapses, it seems hard to imagine that Germany would allow its largest bank to fold. The economic ramifications for Europe’s largest economy would be overwhelmingly negative.
Today, the European Central Bank has the tools to step in. While new E.U. rules limit taxpayer assistance, it’s not prohibited (Financial Times). That’s not to say that additional problems for Deutsche Bank won’t create short-term volatility at home. It could. But a Lehman moment that creates turmoil in Europe seems unlikely.
In the short run, there are many events that can crop up and either fuel an advance or hinder share prices, including a presidential election that’s coming in November. When all is said and done, the financial markets will turn their attention once again to the economy and corporate earnings, just as they have in the past. U.S. fundamentals remain intact and at this point, we do not see recession in the near future and do expect a positive finish to 2016.
We hope you have a great week ahead, and if we can ever be of further service to you in any way, please don’t’ hesitate to call or email us at any time. We look forward to working with you in the years to come.
Your TEAM at F.I.G. Financial Advisory Services, Inc.
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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.