Quarterly Market Summary and Outlook October 2016 1 Modest Volatility, an Election, and a European Bank e third quarter began on a very uneven footing. e 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. However, hindsight has a way of offering clarity that’s difficult to grasp in the middle of the storm. While markets at home take their longer-term marching orders from profits and profit expectations, in the short-term any number of variables such as the surprise vote in the U.K. can influence sentiment. In reality, Brexit led to a two-day selloff in shares (St. Louis Fed Reserve). When cooler heads prevailed, the selloff was quickly followed by new highs for the S&P 500 Index (see Figure 1) and the Dow. In fact, the S&P 500, Dow Industrials and Nasdaq Composite all reached new all-time highs in August on the same day, the first such occurrence since December 31, 1999. When negative geopolitical or global events occur, they can create short-term selling pressures, as we’ve witnessed on several occasions. September did bring heightened volatility for stocks over August’s calmness and as expectations for the next Fed rate hike moved from September to December, a bond rally was sparked late in the quarter. Portfolios diversified across and within asset classes fared well as market participation continued to broaden. International equities outperformed domestic equities, increases in real estate continued, and emerging markets were aided by currency stabilization and commodity prices. Sources: MarketWatch, U.S. Treasury, CNBC, St. Louis Federal Reserve *Includes Quarterly Change, June 30, 2016 through September 30, 2016 DJIA 1 +2.11 +5.07 Nasdaq Composite 2 +9.69 +6.08 S&P 500 Index FTSE Developed ex North America Index 3 +3.31 +6.08 +6.31 +0.10 Oil per barrel 4 $48.05 (-2.15) $37.07 Gold per ounce 5 6 $1,322.50 (+1.75) $1,062.25 3-month T-bill 0.29 (+0.03) 0.16 2-year Treasury 0.77 (+0.19) 1.06 10-year Treasury 1.60 (+0.11) 2.27 30-year Treasury 2.32 (+0.02) 3.01 Index Q3 Return*(%) 2016 YTD Return (%) Bond Yields Yield (%) as of 9/30/16 Yield (%) as of 12/31/15 Commodities Price as of 9/30/16* Year End 2015 S&P 500 Index 1,800 1,850 1,900 1,950 2,000 2,050 2,100 2,150 2,200 12/31/15 2/29/16 4/30/16 6/30/16 8/31/16 Fig. 1 Data Source: St. Louis Federal Reserve Last Date: September 30, 2016 Knee-Jerk Brexit Reaction New High Modest Volatility Resumes
Transcript
Quarterly MarketSummary and Outlook
October 2016
1
Modest Volatility, an Election, and a European Bank
�e third quarter began on a very uneven footing. �e 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. However, hindsight has a way of o�ering clarity that’s di�cult to grasp in the middle of the storm. While markets at home take their longer-term marching orders from pro�ts and pro�t expectations, in the short-term any number of variables such as the surprise vote in the U.K. can in�uence sentiment. In reality, Brexit led to a two-day sello� in shares (St. Louis Fed Reserve). When cooler heads prevailed, the sello� was quickly followed by new highs for the S&P 500 Index (see Figure 1) and the Dow. In fact, the S&P 500, Dow Industrials and Nasdaq Composite all reached new all-time highs in August on the same day, the �rst such occurrence since December 31, 1999.
When negative geopolitical or global events occur, they can create short-term selling pressures, as we’ve witnessed on several occasions. September did bring heightened volatility for stocks over August’s calmness and as expectations for the next Fed rate hike moved from September to December, a bond rally was sparked late in the quarter. Portfolios diversi�ed across and within asset classes fared well as market participation continued to broaden. International equities outperformed domestic equities, increases in real estate continued, and emerging markets were aided by currency stabilization and commodity prices.
Sources: MarketWatch, U.S. Treasury, CNBC, St. Louis Federal Reserve *Includes Quarterly Change, June 30, 2016 through September 30, 2016
DJIA1 +2.11 +5.07
Nasdaq Composite 2 +9.69 +6.08
S&P 500 IndexFTSE Developedex North America Index
3 +3.31 +6.08
+6.31 +0.10
Oil per barrel
4
$48.05 (-2.15) $37.07
Gold per ounce
5
6 $1,322.50 (+1.75) $1,062.25
3-month T-bill 0.29 (+0.03) 0.16
2-year Treasury 0.77 (+0.19) 1.06
10-year Treasury 1.60 (+0.11) 2.27
30-year Treasury 2.32 (+0.02) 3.01
Index Q3 Return*(%)2016 YTD Return (%)
Bond YieldsYield (%) as of 9/30/16
Yield (%) as of 12/31/15
Commodities Price as of 9/30/16*
Year End 2015
S&P 500 Index
1,800
1,850
1,900
1,950
2,000
2,050
2,100
2,150
2,200
12/31/15 2/29/16 4/30/16 6/30/16 8/31/16
Fig. 1
Data Source: St. Louis Federal Reserve Last Date: September 30, 2016
Knee-Jerk Brexit Reaction
New High
ModestVolatilityResumes
2
U.S. economic data releases have been mixed, but lean positive. Fed chair Janet Yellen recently stated that economic data supports higher rates, but Fed communications have been contradictory and confusing. 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). �is is a very cautious Fed and it’s in no mood to surprise �nancial markets. In other words, those patiently waiting for the day when safe investments will o�er a more palatable return may have to wait even longer.
Still, let’s look past Fed policy and review the long-term driver of stocks – pro�ts and pro�t expectations. Figure 2 illustrates the earnings recession that began Q3 2015 may extend into the Q3 2016. But it also highlights a forecast of a much better fourth quarter, which has played a signi�cant role in supporting shares.
Too Big to FailToo 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 �nancial system (Wall Street Journal). Without diving into the weeds, problems continue to bubble just under the surface with a bank that sports assets of just under $2 trillion.
As onerous as bank bailouts can be, Germany may �nd itself in the unenviable position of having to stand behind its largest bank. One thing we painfully learned from 2008: once con�dence evaporates, a bank is in very big trouble. I suspect
this is not a “Lehman moment,” which is a reference to the disorderly 2008 failure of Lehman Brothers and the subsequent �nancial 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. �e economic rami�cations 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). �at’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.
A Barroom Brawl
It’s a tongue-in-cheek way of describing the upcoming election, and I would be remiss if I didn’t address what’s going on. �at said, I’ll cautiously tiptoe into a mine�eld of opinions. So far, there’s been very little volatility inspired by the upcoming vote. In fact, markets reacted favorably to the �rst debate when a CNN poll suggested Hillary Clinton bested Donald Trump. Yet, that remark seems to �y in the face of conventional wisdom. Wouldn’t Wall Street prefer a Republican? Aren’t Republicans the party that favors business and investors? Won’t Trump’s tax policies aid business? Wall Street also favors certainty over uncertainty, and professional investors see continuity with a Clinton win. Trump’s strong rhetoric fuels passions among his supporters, but it also sparks heightened uncertainty among professional investors. And heightened uncertainty can create short-term volatility.
It’s analogous to the idiom, “Better the devil you know than the devil you don’t.”
As your �nancial advisor and Chief Prosperity O�cer®, it’s my job to view your investments and strategies through a �nancial lens, and not spout political ideals when it comes to your �nancial goals. �at said, this is not to be viewed as an endorsement of Clinton or Trump.
Long-term, stocks will take their cues from what happens to the economy and corporate pro�ts; the ability for earnings to �nally turn the corner will be closely watched by markets. Short-term, many issues can crop up that either fuel an advance or hinder shares, including a presidential election. �e long-term trajectory of the U.S. economy is positive, as has been the case for over 200 years. While either candidate may implement policies that help or hinder the economy, U.S. fundamentals remain intact. �e opportunity for companies to start performing up to their prices would be warmly welcomed by investors overall.
S&P 500 EarningsChange from a year ago
Fig. 2
Actual Forecast
S&P 500 Earnings forecast as of July 1, 2016S&P 500 Earnings forecast as of September 30, 2016
Data Source: Thomson Reuters as of September 30, 2016
Major Asset Class Representative Market Index YTD 1 Year 3 Year 5 Year 10 Year 5 Yr Std Dev
Annualized for periods greater than one year. Past performance is no guarantee of future results. Source: FactSet, Red Rocks Capital, Hedge Fund Research. Total returns as of 6/30/2016.
Some content has been provided by ValMark Advisers, Inc., Financial Jumbl, LLC.Barclays Capital Municipal Bond Index – A benchmark index that includes investment-grade, tax-exempt, and �xed-rate bonds with long term maturities (greater than two years) selected from issues larger than $50 million.Barclays Capital U.S. Aggregate Bond Index – An unmanaged market-value-weighted performance benchmark for investment-grade �xed debt issues, including government, corporate, asset-backed, and mortgage-backed securities, with maturities of at least one year.Dow Jones/UBS Commodity Index – A rolling commodities index composed of futures contracts on 19 physical commodities traded on U.S. exchanges. �e Index serves as a liquid and diversi�ed benchmark for the commodities asset class.FTSE EPRA/NAREIT Global Real Estate (Financial Times and London Stock Exchange European Public Real Estate Association/National Association of Real Estate Investment Trusts) – �e FTSE EPRA/NAREIT Global Real Estate Index is designed to represent general trends in eligible listed real estate stocks worldwide. HFRX Global Hedge Fund Index (Hedge Fund Research Inc.) – �e HFRX Global Hedge Fund Index is designed to be representative of the overall composition of the hedge fund universe. It comprises eight strategies: convertible arbitrage, distressed securities, equity hedge, equity market neutral, event driven, macro, merger arbitrage, and relative value arbitrage. �e strategies are asset-weighted based on the distribution of assets in the hedge fund industry. MSCI All Country World ex-U.S. (Morgan Stanley Capital International) – �e MSCI All Country World Index ex-U.S. is a free �oat adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets, except the U.S. Advisory Services o�ered through FDP Wealth Management, LLC, a state Registered Investment Advisor.Securities o�ered through Valmark Securities, Inc., Member FINRA/SIPC.130 Springside Drive Suite 300 Akron, OH 44333-2431 800.765.5201FDP Wealth Management, LLC is a separate entity from ValMark Securities, Inc.FDP Wealth Management, LLC, Valmark Securities, Inc. and their representatives do not o�er tax advice. You should consult your tax professional regarding your individual circumstances.
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