Quarterly Market Letter – 3Q 2015

Uncertainty about Fed policy, woes in China, and sliding commodity prices weighed heavily on the equity markets in the third quarter, bringing about the long awaited correction that had eluded stocks for almost 4 years. 

Global growth concerns took center stage as China’s economy continues to slow.  The Chinese government took the markets by surprise in August devaluing the yuan in an effort to prop up the sliding stock market and aid the slumping manufacturing sector.  In spite of the currency move, in addition to other measures like outright purchases of securities and halting trading, the Shanghai Composite still lost more than 25% during the quarter.

The Fed also added to the uncertainty in the quarter, as the prospect of rising rates weighed on investors’ minds.  The U.S. economy remains steady, with good data one week and bad the next, but the Fed decided to keep rates unchanged in September.  Rather than the equity markets cheering low rates, they sold off sharply after the Fed’s decision, shining an even bigger spotlight on China and global growth concerns. 

Commodities took the worst hit as China has accounted for the much of the demand now for several years.  Unsurprisingly, energy and the materials sector were yet again the worst performers in the quarter with energy down -18% and materials off -17%.  Healthcare, which has been one of the bright spots in the market the past few years, was also down -11% during the quarter.  The only positive sector in the quarter was the interest rate sensitive Utilities which gained +4.4% after retreating earlier in the year.

The fixed income market for the quarter (as measured by the Barclays Intermediate Government/Credit Index) was up +.95%, bringing year-to-date performance to +1.77% and trailing twelve month performance to +2.68%.  Yields (as measured by the market proxy of the 10 year Treasury Bond) for the quarter were down (prices up) from around 2.35% to 2.04%, having peaked in early July at 2.46% and troughed at an even 2.00% in mid-August.  Year-to-date rates are down about .15%.  For the year ended September, rates are down .45%.

Volatility spiked in the quarter as the markets grappled with global slowing.  The equity markets finally registered a 10% correction and earnings are expected to head south due in large part to the turmoil in the commodities complex and the strong dollar.  Although we do not believe a global recession is in the offing at this juncture, we do believe those headwinds, in addition to other economic concerns around the globe, will keep economic growth muted and interest rates low for the near term.  We continue to focus our investments in strong companies we believe will deliver over the long-term and can withstand the ebbs and flows of the economic backdrop around the world.

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