September 2015 Month In Review
An email came across my inbox this last month that quoted Green Day, “Wake me up when September ends.” I had to smile and think how catchy that song has been over the years, and then it reminded me how so many investors are probably looking at their investments and throwing in the towel, raising the white flag, etc. But before you lose any more sleep at night and definitely before you hit the SELL button on your computer (or tell me too), a few comments to bring refuge and order to what seems like a market filled with chaos.
To recap, the S&P 500 ended the month -2.47% bringing its last two months total return to -8.36%1. The Barclays Aggregate Bond Index ended positive 0.88% after being flat in August1. So what to expect for the final quarter of this year?
First off it’s so extremely important to decide whether we are currently in a recession or not. What is a recession? Investopedia says that the “technical indicator of a recession is two consecutive quarters of negative economic growth as measured by a country’s gross domestic product (GDP).2” Last Friday (Sept 25th) the Bureau of Economic Analysis revised their second quarter GDP up to 3.9% (annualized)…quite a bit higher than the initial estimate of 2.3%. First quarter GDP was 0.6%3 - think Polar Vortex 2.0 and the port strikes. In fact while the first quarter this year was reminiscent of the first quarter in 2014, unlike 2014, we still ended the quarter with a positive GDP. So this put the first halve of the year at a 2.3% pace…hardly recession worthy.
Another indicator of whether the economy is expanding or contracting is the ISM Purchasing Managers Index (talked a lot about in our communications). September’s reading came in slightly above 50 – indicating the economy is growing, just at a slower pace4.
Another indicator is the jobs market. With the report that came out yesterday (October 1st) U.S. Jobless claims are near their lowest they’ve been in over a decade. So amid all the hype of emerging countries in peril, the U.S. is retaining more and more of its employees5. With wages continuing to move up the fundamental outlook for the jobs market is still improving. Today (October 2nd) the jobs report came in lower than expected with last months revised lower, however unemployment remains at its lowest level since 2008 at 5.1% and underemployment (people wishing they had better jobs) lowered to levels we haven’t seen since May 20086.
Given the information we have, it is highly unlikely that the U.S. is going to be pulled into a recession in the near future. So then, what does a 4th quarter look like over the last 15 years? Going back to 2000, the fourth quarter has averaged a positive return of 4.0% for the S&P 500. Take the years out where we WERE in a recession, and the average return was 7.4%1. So while we don’t want to predict an incredible rally in the S&P 500 in just 3 months, we do know that the market tends to get energized at the end of the year – especially taking to account holiday spending and corporate buy backs. So while we have a super-strong dollar to worry about, continued low energy prices, a potential Fed rate hike on the horizon, and growth issues in the global economy (mainly China and Russia), the fundamentals for the U.S. remain strong and we continue to be cautiously optimistic about the remainder of this year.
As it relates to the Federal Reserve and the impending rate hike, we believe that the market is now more-volatilely reacting to the uncertainty that a “no-rate-hike” brings than a small ¼ of a point rise in interest rates brings. In fact there are certain areas of the market that are anxiously awaiting the rate hikes. The underlying issue, in my opinion, is that the Federal Reserve is acting outside of their responsibilities in creating unrest about global markets, when they should be focused on their duel mandate of promoting maximum sustainable employment and price stability. It is historically shown that when rate hikes happen and the 10-year Treasury is under 5.0% markets react positively, even more so at our current rate of 2.04%7. I believe that the markets, and therefore the corporations themselves will benefit from the methodical, slow-pace rate hikes that Janet Yellen has promised us. As well, it would be good to have the rates be above 0% so that when our next downturn in the economy DOES come, the Fed has a little bit of ammunition to expend.
And a final note on China. We have put out many articles by our research team in Boston and many communications from us about the effects of China to the global economy, and mainly to the U.S. Please refer to those for more information. However I will leave you with this final statistic. Apart from common thought, China is not our number one exporter. In fact it’s number three, right behind Mexico and Canada (#1). And while #3 sounds scary, when you look at all the U.S. exports combined, China only makes up 7.4% of it. So if China CEASED TO EXIST our exports would only suffer 7.4% (I’m obviously not accounting for the ripple effect of a country suddenly ceasing to exist, but you get the idea). So while China is much more important than the previous annoying fly on our shoulder called Greece, we must take all the news with stride, knowing that the number one issue we need to be worried about is the health of our own land…and right now it’s not looking too bad. Maybe instead of the markets creating panic from the noise in the news that is seemingly less impactful than it is made out to be, we should be thinking of the other Green Day lyric that goes, “You can’t go forcing something if it’s just not right.” (When I Come Around).
So while the markets are in a bit of a volatile state, how we react and proactively manage our portfolios takes into account short-term swings as well as long-term views of the market and economic cycle.
As always, we continue to manage your wealth and expectations to the best of our ability.
Enjoy the entrance of Fall,
Brian.
1Morningstar Office
2http://www.investopedia.com/terms/r/recession.asp
3http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm
4https://www.instituteforsupplymanagement.org/ismreport/mfgrob.cfm
5http://www.bloomberg.com/news/articles/2015-10-01/jobless-claims-in-u-s-rise-in-see-saw-pattern-near-decade-lows
6JP Morgan’s Guide to the Markets U.S. | 2Q 2015, page 12
7http://www.bloomberg.com/news/articles/2015-10-02/s-p-500-futures-follow-global-stocks-higher-before-payrolls-data
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