Market Commentary

- 2015 3rd Quarter

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Global Markets: Neutral

A short 3 months ago the investment world was worried about Greece.Today the real threat to market performance is China and other struggling emergingmarkets. With a slowdown in China, and recession in places like Russia and Brazil, the rest of the world is left wondering, “How will this affect us?”  Nonetheless, domestic demand in developed areas, and in the healthier EM countries acts as a counterbalance to these forces, warranting our neutral position.

U.S. Economy: Good

U.S. Economic data continue to be healthy.  Job creation continues, housing starts are still climbing toward a more normal range, and we see the strongest automobile sales in 13 years.  Credit is still inexpensive, and the US consumer, who accounts for about 2/3 of the economy, is still spending while still maintaining an above average savings rate.  Corporations also continue to spend and hire.  Although there have been some earnings revisions, the recent selloff has pushed P/E ratios below the levels that are appropriate in the type of economic environment we are experiencing at this time.

Inflation: Good

Inflation continues to be well below historical averages at 1.5%.  The effect of low energy costs, low interest rates, low cost manufacturing, and other factors on prices of all goods and services is still in play, keeping the inflation rate at about half the level of a historical norm.

Interest Rates: Neutral

Yellen’s very cautious stance still seems to be in play.  The Fed’s decision not to begin normalizing rates in September was received by the market negatively.  A raise in rates would be seen as a “vote of confidence” by the fed. It seems that the timeline for inevitable future rate increases continues to shorten.

U.S. Stock Market: Good

Valuations based on projected earnings are now slightly underdone vs. historical norms. In addition, even given the very volatile negative quarter, there is little to support this being a sign of greater doom, but looks more like a normal mid-cycle decline.  The areas to watch over the next 2 -4 quarters are energy prices and investor sentiment.  The investment community is jittery, looking for an event to push the US markets into correction territory.  Political pressures heading into an election, and the possibility of a geopolitical crisis of some type could outweigh the healthy economic data we continue to see.  Absent typical bearish indicators we have to maintain an overweight to equities.  We feel that even with the last quarter spooking many investors, the markets will continue to move up over the next year.

U.S. Bonds: Cautious

Volatility continues, which favors neutral to short duration and high quality corporates with some exposure to Treasuries to protect portfolio value.  The 10 year ended the quarter at 2.05%, with yields falling significantly across the fixed income spectrum as investors fled to safer territory during the recent equity market downturn.  As the markets move closer and closer to interest rate increases active management of duration, quality, security type and yield will help to temper the effects of rising rates.



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