Our Investment Committee’s Quarterly Update

Our Investment Committee’s Quarterly Update


Each quarter, our investment committee reports the latest economic and market updates. Please review our latest update provided by our Chief Investment Officer, Matt Reiner.


Economic Activity

Economic data continued to improve in the third quarter, on the whole.

–    Confidence for the most part weakened a bit during the quarter, and rightfully so.  Volatility picked up in Q3 which puts many investors on edge.

o The Good: The University of Michigan reading trended higher throughout the entire quarter.

o The Bad: Bloomberg consumer comfort reading and the Conference Board’s measurement of confidence declined this quarter.

–    Housing had an overall better quarter, despite not seeing engines firing on all cylinders.

o The Good: Building permits trended higher, as did housing starts. New home sales were up for the quarter, while we saw more positive numbers for mortgage applications than negative readings. Home prices were up for the quarter, but they are continuing to cool each quarter.

o The Boring: Existing home sales were flat for the quarter.

o The Bad: Pending home sales continue to be negative month-over-month and year-over-year.

–    Inflation isn’t occurring in the headline numbers. We are beginning to see a little wage growth, which is good. But all this worry about needing to raise rates to nix inflation seems a bit early.

o The Good:  None.

o The Boring: PCE and PPI didn’t see any month-over-month increases during the quarter.

Minimal growth with PPI tells us producers aren’t worrying much about input costs rising.

o The Bad: CPI actually declined in terms of year-over-year growth, while PMI reverted its second quarter trend and began to fall.

–    Manufacturing has got to be the longer term (economic) darling of this bull market run.  It has been mostly stronger throughout the ride.

o The Good: Capital goods orders and shipments had a positive quarter.  Both ISM manufacturing and non-manufacturing were up for the quarter.

o The Bad: Capacity utilization had been trending higher and ticked a bit lower during the past quarter.

–    Employment continues to see positive trends and this is pleasing investors, which is helping to continue the bull run.

o The Good: Nonfarm payrolls trended higher for the quarter despite a weak August reading.

Initial jobless claims dipped below 300K and stayed there for a good portion of the quarter.  The underemployment rate trended lower and dropped below 12%, while the unemployment rate trended lower and dropped below 6%.

o The Boring: Department of Labor private payroll numbers were good but were flat for the quarter. And, labor force participation stayed flat for the quarter.

o The Bad: ADP employment numbers weren’t great. They actually declined on an overall basis for the quarter.


Equity Activity

The third quarter provided a little more angst for investors as volatility came back and geopolitical risks hogged the headlines. Despite all of it, equity markets found a way to move higher.

–    Volatility re-entered the landscape as the VIX came off extreme lows. The VIX index was up nearly 41% for the quarter.

–    Corporate inversions were a hot topic and Warren Buffett came under the microscope, for a second, when he assisted Burger King’s acquisition of Canada’s Tim Hortons.

–    All hailed ‘Ali’baba this quarter as the Chinese giant listed on the NYSE….  And the company quickly became one of the most valuable companies in the world.

–    Apple caught up with the cell phone trends as they released a larger screen iPhone.  Also, they launched a payment processing platform along with a trendy smart watch.

–    Ebola has filtered its way into the headlines and some of the uncertainty has market participants on edge.

–    Family Dollar caused headlines as Dollar Tree initially decided to buy the company, causing sector leader Dollar General to put in an unsuccessful offer.

–    Cyber security remains a concern and Home Depot was the latest victim in Q3.

–    Nike was the Dow’s best performer rising 15.02%.

o While Caterpillar was the worst performer falling 8.87% for the quarter.

–    Performance for the quarter through 3-31-2014:

o Dow up 1.29%, S&P up 0.62%, NASDAQ up 1.93%

o 10-year Treasury yield fell 4bps to 2.49%

o GLD down 9.24% and OIL down 12.24%


Storylines:  The Past & Future


Banks just can’t get away from ‘08


Last quarter was one banks would like to forget… quickly.  The fines rolled in heavily for a couple of banks. BNP Paribas paid $9 billion for laundering charges.  Citi paid $7 billion to settle mortgage probes. And Bank of America came in with the highest fine, paying $17 billion to settle their mortgage allegations.  These were just the recent fines; these banks have been paying fines along the way as well.





Bond king leaves his throne


To end the quarter, bond investors were surprised to see Bill Gross leave the behemoth he built, Pimco. He left for a smaller company in Janus and to work just as a portfolio manager, not as an executive.  Rather than having cause for fear, I think this is more of an internal matter at Pimco. Bill Gross didn’t like to manage people, he is an investor. And he wasn’t managing people well, so they were pushing him out.  And instead of being pushed out, he just left to do what he most likes to do… manage investments. Pimco will be fine and so will Bill Gross. This is more of a headline than it is a reason for concern.


Rates on the rise…eventually


Everybody keeps calling for rates to rise, but they continue to be wrong.  Rates fell for the quarter and despite seeing a slight tick higher mid-quarter, bonds acted as they are supposed to.  When fears arose in the equity markets, people fled to bonds… which pushed rates down.  That’s the proper mechanics of the bond market. And despite the Fed’s actions and all the worrisome headlines, rates remain low.  This is a growth story; until we see economic growth, rates will have a tough time rising anywhere quickly.


A slight drop turns to a heavy reaction


Markets closed out the quarter trending down.  Actually, they fell 3.24% (through October 1st) from their most recent peak. This drop made many investors begin to hoot and holler that the correction is upon us.  A correction would be very welcome. A 2011 repeat and dare I say a 2008 repeat doesn’t look to be in the cards. Jobs are being added. Rates are still at 0.  Manufacturing continues to be strong. And economies outside the U.S. are still trying to find themselves. That bodes well for monies flowing to U.S. markets.


Geopolitical hurdles


Geopolitical risks are growing by the day.  We have had Ukraine and Russia issues for a while. And Israel and Hamas haven’t been really cooperating. We have ISIS (ISIL), which has led to the U.S. taking action. Ebola fears have arisen and we have protestors taking over Hong Kong (although they have subsided recently). Oh, and Scotland just went under a very important vote that kept them as part of the U.K.  It takes an unexpected escalation of one of these issues or a bigger one to come onto the horizon to cause the markets to take a breather. Remember, it tends to be the unexpected issue that moves the markets as opposed to the expected.


The Final Word


Q3 was full of headlines despite volume being very low during the heat of the summer.  Despite the headlines and increased volatility, markets stayed resilient… and eked out a gain.

Q4 will likely bring much of the same, with volatility continuing to play a part, along with headline risks.


The geopolitical risks aren’t going anywhere. But we will likely get a greater focus on our own political system with mid-term elections in November. Many are looking to the results of our mid-terms to determine how the 2016 presidential election will turn out.  The results, whether they are what investors want or not, could cause some shorter term movements, but likely won’t have a huge longer term impact on the markets.


Also, in Q4, the Fed will wrap up their bond buying program in October and markets will adjust expectations. They will also spend a majority of Q4 and 2015 trying to predict when the Fed will begin to raise rates (a bad idea).


Overall, Q4 seems to be positioning itself to fit into the general mold for the year.  We will likely plod along to get to the end of the quarter and see a market that is slightly higher. This will leave many investors to wonder how that occurred. But, we are in the midst of a bull market and it takes a lot to bring a bull all the way down.


And if something happens to deter the bull in Q4 that would seem like a very good time to increase the speed of putting money to work. Otherwise, dollar cost averaging into portfolios and diversifying amongst stocks and bonds continues to be investors’ best bet.



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