Who has two thumbs and does not think we are headed back into a recession? This guy!
But wow! The 3rd quarter was a tough quarter. 2015 has somewhat been shaping up to be similar to 2011. Remember 2011? Which by the way was also a pre election year. In 2011 we had uncertainty in Europe and flat out turmoil in Greece causing anxiety of a possible global financial melt down, talks of double-dip recession and slowdown in U.S economy, reduction in corporate earnings, threats of U.S Government shutdown, and to top it off we had the Federal Reserve increasing anxiety as it really did not have any way to combat another slowdown or recession.
Fast forward to today, and we still have issues in Greece (No those have not disappeared), The Federal Reserve is increasing anxiety in the markets by postponing any interest rate hike, Global recession fears as China’s economy slows down, and once again concerns of a U.S slowdown as we see several companies reducing earning forecast. (Though this time currency is playing a big role)
What was the result in the market for the 3rd quarter?
– In the equity markets we saw declines on all fronts. It was difficult to avoid this pothole. The worst hit was the emerging markets seeing declines around -18% with China’s Shanghai composite seeing some of the worst losses of -28%.
– On the domestic equity markets we saw most of the major indexes down between -6.5% and -8% with small and mid company indexes down roughly -12%.
– Commodities, especially Crude Oil have also been taking center stage in the news lately. In general, commodities continued their decline that started in the latter part of the 2nd quarter. Crude Oil is down -26% for the year still.
– It feels like the Fixed Income sector was just placed on hold as the announcement from the Federal Reserve about interest rate policy was pushed off as all eyes look upon China and the world economy.
So what’s the outlook?
As is always the case, the markets do not recognize a calendar of events to dictate when a change of trend or continuation will take place. However staying on the similarities of 2011, it is interesting to note that the market in both 2011 and 2015 pretty much were flat the first half of the year. Now 2011 was what I would call a boring year, finishing off right where it started, but gave us a scary 20% sell off in the 3rd quarter.
As I have mentioned previously, our expectations of the market were muted for this year. I think it would be good if we are able see a repeat of 2011 and finish the year off flat to slightly positive (0% – 3%).
With regard to the Federal Reserve, the anxiety of “will they or won’t they” will persist for some time and will ultimately shift to how little or how much. The probabilities of a Fed rate hike before December look slim.
What are we looking at?
We particularly feel sectors such as energy and basic materials are under valued. We still like healthcare and technology. We continue to favor domestic equity but feel emerging markets could see greater rewards over the long term. We also continue to favor smaller size companies a bit more than larger global companies while the U.S dollar strength continues to make exports weaker.