Investment Commentary – September 2nd, 2015
Market Indices as of Market Close September 2nd, 2015
Dow 16,351 (-8.26% YTD)
S&P 500 1,949 (-5.34% YTD)
NASDAQ 4,750 (0.29% YTD)
Global Dow 2,313 (52 week low 2,263/high 2,644)
10-year Treasury 2.19 (52 week low 1.64/high 2.66)
Gold $1,133 (52 week low $1,074/high $1,310)
Oil $45.97 (52 week low $37.75/high $91.84)

“Thought of the week”
After years of relative calm, equity markets have finally suffered their first correction since 2011, falling -12.4% from the May 21st highs (through August 25th) and snapping the third longest streak without such a correction in fifty years. Fears over slower growth in China, uncertainty around the timing of rate hikes and technical factors related to market positioning all played a role. But how unusual is this correction? As it turns out, not very; in 19 of the last 35 years, markets suffered a decline of 10% or more, and in all but two of those 35 years markets saw 5% declines or more. Importantly, we don’t see this correction as morphing into a full blown bear market; the U.S. economic data remains solid, commodity prices and inflation are low, and monetary policy will remain extremely accommodative, even if the Fed hikes rates. For investors, it is times like these that the power of diversification is on full display. During the 12.4% correction, a portfolio of 60% stocks, 40% bonds would have only suffered a drop of 7.8%.

“A See-Saw Week”
Stocks experienced their most volatile week in years, but still managed to close with modest gains. The S&P 500 Index rose 0.91% to 1,988 and the Dow Jones Industrial Average gained 1.12% to end the week at 16,643. The tech-heavy Nasdaq Composite Index fared better, climbing 2.59% to 4,828. Meanwhile, despite the extraordinary level of volatility, bond yields were surprisingly resilient, with the yield on the 10-year Treasury rising from 2.05% to 2.18%, as its price correspondingly slipped.

Investors may be feeling unnerved from the recent roller-coaster ride in the markets, but it is important to maintain perspective. U.S. growth has been stalwart in the face of a slowdown in emerging markets. And to the extent the U.S. avoids slipping into a China-induced recession, we believe market fundamentals remain sound. With that as our base case, we expect volatility to remain elevated, but believe the selloff has created some areas of value.

“Economic Resilience Offers a Bulwark”
It is important to note that the recent resilience in U.S. economic data paints a comforting picture, confirming a longer-term trend: The economy is still in relatively decent shape. Put another way, for all the markets’ twists and turns, and despite the economy’s headwinds and travails, this is not 2008.
A quick refresher: While stocks peaked in the fall of 2007, markets did not really start their meltdown until the following spring. By then, however, there were already several indicators flashing red, not only for the market but for the broader economy. For example, by May of 2008, leading economic indicators had been consistently falling for nearly two years, new orders data had been contracting for six months and unemployment had been rising for 18 months.

In contrast, the U.S. economy is now holding up relatively well, despite the challenges in China and some other emerging markets. True, nobody would confuse the current economy with the glory years of the late 1990s. But leading indicators are up over 4% year-over-year, new orders are comfortably in expansion territory and job creation remains robust. Although it’s still entirely possible to have a bear market despite a decent economy, given solid growth and a timid Fed, we don’t believe the current correction marks the end of the bull market.

“First ATM opens for business”
On this day in 1969, America’s first automatic teller machine (ATM) makes its public debut, dispensing cash to customers at Chemical Bank in Rockville Center, New York. ATMs went on to revolutionize the banking industry, eliminating the need to visit a bank to conduct basic financial transactions.

The views presented are not intended to be relied on as a forecast, research or investment advice and are the opinions of the sources cited and are subject to change based on subsequent developments. They are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.

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