Quarterly Market Commentary Q3 2016

Economy Quarterly

Third Quarter 2016

Domestic Equity Markets

US equity markets showed some bounce in the third quarter but closed with mixed results. The month of September saw NASDAQ post gains of almost 2% whereas the S&P 500 was basically flat – up a modest 0.02%. The Dow Jones Industrial Average lost about 0.41% for the month. The third quarter, on the other hand, saw the DJIA up almost 3%, the S&P 500 up almost 4% and NASDAQ skyrocket over 10%. Taken together, these numbers delivered the best quarter we’ve seen so far in 2016.

Yet while the numbers were very strong, many are worrying that October could bring a surprise or two, especially given the upcoming Presidential elections and as earnings continue to disappoint. Many think that the most significant risk to domestic markets heading into the fourth quarter will be the Presidential election. And no matter which poll you believe, the reality is that both Clinton and Trump have a chance to be our next President. And given that their policies are so different from one another, many businesses are likely delaying any new spending or investment until they see who wins.

On top of that uncertainty, earnings continue to deteriorate, especially when compared to earlier this year. According to FactSet – a supplier of market data and information – as of the end of the third quarter, corporate earnings are expected to decline more than 2%, which is down from a modest gain of 0.3% as of the end of June.

International Markets

Overseas, investors saw developed markets perform well during the month of September and for the quarter. The MSCI EAFE Index – which represents developed international markets – was up 1.23% for September and increased by nearly 6.5% for the quarter.

Emerging markets also performed very well for both the month and quarter. The MSCI Emerging Markets Index rose 1.32% for the month and was up 9.15% for the quarter.

Bond Markets

Fixed income markets showed mixed results for the quarter and the month of September – gaining 0.46% for the quarter after having lost 0.06% for the month of September (using the Barclays Capital Aggregate Bond Index as a barometer).

US corporate high-yield bonds, on the other hand, performed very well, especially for the third quarter. In fact, the Barclays Capital U.S. Corporate High Yield Index was up 0.67% in September and 5.55% for the quarter.

U.S. economic data also mixed

Mirroring the mixed stock market performance, US economic data was also a mixed bag, although probably more positive than negative. The National Association of Home Builders survey surpassed expectations and reached its highest point in over a year.

Unfortunately, the ISM Manufacturing and Non-Manufacturing indices both declined and the Non-Manufacturing index hit a six-year low. Then we saw Consumer confidence hit post-recession highs, which might bring increased household spending heading into the all important holiday season. It’s likely that consumer confidence rose because we also witnessed continued job growth, with over 150,000 jobs being added in August alone.

Then of course we have the US Federal Reserve, which knows an election is coming up and has hesitated to hike rates, for fear of being accused of playing politics. So they did nothing. That being said, most Fed-watchers expect a rate hike in December after the elections.

What’s Next?

As we enter the last quarter of the year, there seems to be a general uneasiness in terms of what we can expect. October has historically brought us lots of surprises and many think that this year will be no different. Maybe third quarter earnings come in higher than expected, rates stay low, the threat of instability around the globe lessens and our bull market can continue charging forward. Or maybe we see signs of an economic slowdown, earnings worsen, central banks raise rates and a news bombshell lands right before the Presidential elections – sending the markets into confusion.

No matter what happens, so long as you are properly diversified, have accepted risks that are commensurate with your goals, you will be fine. If for any reasons you want to discuss your goals, your investments or the markets, please let me know.

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