Broker Check
 

Investor Discussions - Q3|2016 Commentary


Wealth & Pension Services Group
William Kring, CFP, AIF - Chief Investment Officer
10/14/16


Q3|2016 Commentary

The Quarter In Brief

The economy seemed to hit a soft patch this summer, but stocks carried onward and upward – the S&P 500 advanced for a fourth straight quarter in Q3, rising about 3.5%. Markets were notably placid for much of the quarter, even with two major banking scandals, multiple terror attacks, and the latest dispatches from an especially contentious presidential race in the headlines. As Q3 went on, the Federal Reserve all but signaled to investors to expect a rate hike before the end of the year. Home sales, residential construction, factory activity, and consumer spending seemed to wane in the quarter, but consumers grew more confident.1

Domestic Economic Health 

As Wall Street mulled over the chances of a fall interest rate increase, some economic indicators pointed to a summer slowdown. In August, the Institute for Supply Management’s manufacturing purchasing managers index went under 50 (49.4), meaning the sector had contracted for the month. Both industrial and manufacturing production declined 0.4%. Durable goods orders, up 3.6% for July, were suddenly flat. Retail sales fell off by 0.3%, and personal spending was flat after an 0.4% gain in July (personal incomes did manage to rise another 0.2%).2,3

The pace of hiring also moderated in August, though July’s number was revised upward in September. Employers added 275,000 new jobs in July, 151,000 for August. The headline jobless rate (4.9%), the U-6 rate counting the underemployed and the unemployed (9.7%), and the labor force participation rate (62.8%) were exactly the same in both months.4 

Consumer inflation picked up, but wholesale inflation did not. By August, the Consumer Price Index had advanced 1.1% in a year, as opposed to 0.8% in the 12 months ending in July. Core consumer prices were up 2.3% year-over-year by August. In annualized terms, the Producer Price Index showed no change from a year earlier in August; in monthly terms, the PPI fell 0.4% in July and was flat a month later. Core inflation, as measured by the Federal Reserve, increased 0.1% in July, 0.2% in August.2,3

Speaking of the Federal Reserve, it left interest rates alone during Q3. It did, however, clue Wall Street in on the probability of a Q4 rate hike: its latest dot-plot forecast showed consensus for one, and the vote against raising the federal funds rate at its September policy meeting was close (7-3). After the vote was announced, Fed chair Janet Yellen remarked that FOMC members were “generally pleased with how the U.S. economy is doing” – a notably sunny viewpoint. On September 29, she made further headlines by commenting how useful it would be if the Fed could buy securities and corporate bonds to stimulate the economy in a recession (something it is currently prohibited from doing).8,9


Global Economic Health

While Wells Fargo faced Congress for its transgressions (fake accounts? Come on Wells Fargo!), trouble at another, even larger banking giant emerged during Q3. Deutsche Bank looked increasingly shaky after failing the U.S. government’s bank stress test early this summer and barely passing the equivalent test in the European Union. S&P Global Ratings lowered its outlook for DB to negative. By the end of the quarter, CNBC and AFP were reporting that DB was trying to negotiate $14 billion in fines it owed to the Department of Justice down to the $5 billion level; indications were that the German government had no intention to bail the bank out should its situation worsen.1,11              

As stocks go, the international developed market (EAFE) outpaced the S&P for the quarter but still lag the US on a year to date basis.

Looking Back at the Numbers...


INDEX

DESCRIPTION

Y-T-D

Q3 CHG

1-YR CHG

S&P 500

Large US Stocks

3.85

7.84

15.43

EAFE

Large Int’l Stocks

6.43

1.73

6.52

Barclay’s AGG

US Core Bonds

0.46

5.80

5.19


Looking Forward


This is the time of year when bulls yearn for an extended rally. Will they get it? Will S&P 500 earnings surpass (low) expectations? Will the market confidently ride through the election, whatever the outcome? Will it simply and calmly price in a rate hike, assuming that happens? Will investors shrug off any unsettling headlines, whether from home or from overseas? If the market can answer “yes” to those last four questions, the quarter could see impressive gains for the major indices. According to S&P Global Market Intelligence research, the S&P 500 has risen an average of 5% in the fourth quarter since 1990, and advanced in the fourth quarter more than 70% of the time since 1945. The past has little or no influence upon future market behaviors, but even with continued slow economic growth, the overall market mood is still bullish – so perhaps investors will look at earnings first this quarter, then other factors. It is sure to be an eventful and possibly turbulent three months.26 

Finally, as fourth quarter unfolds, we will likely see the markets assess the economic impact of Hurricane Matthew.


William Kring, CFP®, AIF®
Chief Investment Officer



Source: 

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. MarketingPro, Inc. is not affiliated with any broker or brokerage firm that may be providing this information to you. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is not a solicitation or recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks. The NASDAQ Composite Index is an unmanaged, market-weighted index of all over-the-counter common stocks traded on the National Association of Securities Dealers Automated Quotation System. The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. It is not possible to invest directly in an index. NYSE Group, Inc. (NYSE:NYX) operates two securities exchanges: the New York Stock Exchange (the “NYSE”) and NYSE Arca (formerly known as the Archipelago Exchange, or ArcaEx®, and the Pacific Exchange). NYSE Group is a leading provider of securities listing, trading and market data products and services. The New York Mercantile Exchange, Inc. (NYMEX) is the world's largest physical commodity futures exchange and the preeminent trading forum for energy and precious metals, with trading conducted through two divisions – the NYMEX Division, home to the energy, platinum, and palladium markets, and the COMEX Division, on which all other metals trade. The FTSE 100 Index is a share index of the 100 most highly capitalized companies listed on the London Stock Exchange. The DAX 30 is a Blue Chip stock market index consisting of the 30 major German companies trading on the Frankfurt Stock Exchange. The MICEX Index is a cap-weighted composite index calculated based on prices of the 50 most liquid Russian stocks of the largest and dynamically developing Russian issuers presented on the Moscow Exchange. The Hang Seng Index is a freefloat-adjusted market capitalization-weighted stock market index that is the main indicator of the overall market performance in Hong Kong. The Bovespa Index is a gross total return index weighted by traded volume & is comprised of the most liquid stocks traded on the Sao Paulo Stock Exchange. The MSCI Emerging Markets Index is a float-adjusted market capitalization index consisting of indices in more than 25 emerging economies. The S&P/TSX Composite Index is an index of the stock (equity) prices of the largest companies on the Toronto Stock Exchange (TSX) as measured by market capitalization. The MSCI World Index is a free-float weighted equity index that includes developed world markets, and does not include emerging markets. BSE Sensex or Bombay Stock Exchange Sensitivity Index is a value-weighted index composed of 30 stocks that started January 1, 1986. The FTSE Italia All-Share Index is a free float capitalization weighted index that comprises all of the constituents in the FTSE MIB, FTSE Italia Mid Cap and FTSE Italia Small Cap indices. The IBEX 35 is the benchmark stock market index of the Bolsa de Madrid, Spain's principal stock exchange. The CAC-40 Index is a narrow-based, modified capitalization-weighted index of 40 companies listed on the Paris Bourse. The SSE Composite Index is an index of all stocks (A and B shares) that are traded at the Shanghai Stock Exchange. Nikkei 225 (Ticker: ^N225) is a stock market index for the Tokyo Stock Exchange (TSE). The Nikkei average is the most watched index of Asian stocks. The US Dollar Index measures the performance of the U.S. dollar against a basket of six currencies. Additional risks are associated with international investing, such as currency fluctuations, political and economic instability and differences in accounting standards. This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Past performance is no guarantee of future results.  Investments will fluctuate and when redeemed may be worth more or less than when originally invested. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. All economic and performance data is historical and not indicative of future results. Market indices discussed are unmanaged. Investors cannot invest in unmanaged indices. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional.

 Citations.

1 - cnbc.com/2016/09/30/us-markets.html [9/30/16]

2 - investing.com/economic-calendar/ [9/30/16]

3 - marketwatch.com/economy-politics/calendars/economic [9/30/16]

4 - foxbusiness.com/markets/2016/09/02/tepid-august-jobs-report-lack-wage-growth-muddies-rate-hike-picture.html [9/2/16]

5 - tinyurl.com/zho9nnp [9/6/16]

6 - investing.com/economic-calendar/cb-consumer-confidence-48 [10/3/16]

7 - tradingeconomics.com/united-states/consumer-confidence [10/3/16]

8 - latimes.com/business/la-fi-federal-reserve-meeting-20160921-snap-story.html [9/21/16]

9 - reuters.com/article/us-usa-fed-yellen-purchases-idUSKCN11Z2WI [9/29/16]

10 - reuters.com/article/us-wells-fargo-accounts-idUSKCN11X2NW [9/28/16]

11 - cnbc.com/2016/09/28/deutsche-bank-crisis-explained.html [9/28/16]

12 - ec.europa.eu/eurostat# [10/4/16]

13 - reuters.com/article/us-opec-meeting-idUSKCN11Y18K [9/29/16]

14 - markets.on.nytimes.com/research/markets/worldmarkets/worldmarkets.asp [9/30/16]

15 - msci.com/end-of-day-data-search [9/30/16]

16 - coinnews.net/2016/10/01/gold-silver-mixed-in-3rd-quarter-us-mint-coin-sales-strengthen/ [10/1/16]

17 - bloomberg.com/news/articles/2016-10-02/too-many-fat-pigs-are-making-hogs-the-biggest-commodities-loser [10/2/16]

18 - marketwatch.com/investing/index/dxy/historical [10/3/16]

19 - marketwatch.com/story/oil-prices-continue-to-fall-as-doubts-over-opec-agreement-build-2016-09-30/ [9/30/16]

20 - freddiemac.com/pmms/archive.html?year=2016 [10/3/16]

21 - money.cnn.com/data/markets/russell/ [9/30/16]

22 - markets.wsj.com/us [9/30/16]

23 - money.cnn.com/quote/quote.html?symb=VIX [9/30/16]

24 - bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=9%2F30%2F15&x=0&y=0 [9/30/16]

24 - bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=9%2F30%2F15&x=0&y=0 [9/30/16]

24 - bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=9%2F30%2F15&x=0&y=0 [9/30/16]

24 - bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=9%2F29%2F06&x=0&y=0 [9/30/16]

24 - bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=9%2F29%2F06&x=0&y=0 [9/30/16]

24 - bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=9%2F29%2F06&x=0&y=0 [9/30/16]

25 - treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyieldAll [10/3/16]

26 - cbsnews.com/news/time-to-make-some-fourth-quarter-investing-bets/ [9/30/16]

Important Risk & Disclosure Information