Third Quarter 2015 Market Commentary

Third Quarter Market Commentary

Summer was a Bummer!economic activity


At least this was true from an investor perspective!  A quarter like this one hasn’t been experienced since 2011. All three  equity indexes finished in negative territory with the Nasdaq Index down -7.4%, the Dow Industrials Index off -7.6% and the S&P 500 Index  finishing -6.9%. As forecast in our commentary for the 2nd quarter, volatility remained rampant. During the quarter the VIX Index, a forward-looking representation of what sort of volatility the markets expect in the short-term, ranged from 15 to peak at 40. The average for this Index is around 20, so a reading higher than the average is interpreted as an expectation for higher than usual market volatility in the near term.  Even with the downward market adjustment, bargains in stocks remain hard to find. Most stocks are still trading around a 16.7 multiple of earnings, when the historic 10 year average is a multiple of 15.7.

Confounding the situation is the lack of signals for a contracting U.S. economy. GDP is still forecast to expand at a healthy 2.5% annual rate. Unemployment remains low, and there is no evidence of wage inflation.  Construction activity and car sales show strong growth accompanied by signs of improved median household income.

With these positives in the U.S. economy, the only place left to look was the global markets. This is where things turned ugly. China experienced a big downturn in output during the quarter and leadership in the government neglected to take decisive actions or give convincing arguments supportive of a prosperous position. Consequently, the China manufacturing slow down caused importation of raw materials from U.S. companies to decrease considerably and also reduced energy consumption which acted to further depress the global price of petroleum-based fuels.

Finishing the year with financial markets in positive territory will be a challenge. One ingredient needed is continuing strong growth in employment. The September employment report came in at a growth of 142,000 jobs, while the forecast was for 200,000. Additional needed ingredients are reports of growth in third quarter revenue and earnings, plus strong guidance forecasts for future growth.

All of the foregoing activity was sufficient cause for the Open Markets Committee of the Federal Reserve to take a step back from instituting a modest increase in interest rates long predicted for September. The Committee cited fears of throttling continued recovery in the global and U.S. economies as the reason for yet another postponement of an interest-rate hike. With the absence of inflationary pressures and continuing struggles in global economies, it is likely that a small initial interest rate bump will be pushed into 2016.

Expectations for the remainder of 2015 are moderately positive for the U.S. economy. Earnings of U.S. companies are expected to improve because of the continuing presence of market indicators that are positive for growth and the absence of indicators that are predictive of market contraction.  Globally, earnings estimates for developed markets like Europe and Japan have been rising and should continue to improve.  It is expected that the economies of emerging countries and China will struggle, continue to present significant investor risks and will remain a root cause of volatility.  That said, these markets also provide diversification and offer opportunities for future gains.  Weakness in the energy sector is predicted to diminish; however, other commodities and raw materials are expected to continue to struggle.

UPAL continues to advocate a long-term buy and hold strategy of disciplined regular investing. In light of the global economic near term outlook, we continue to favor diversification among equity, fixed income and alternatives asset classes consistent with individual investor tolerance for risk, with a modest  overweight to U.S. equities.

We have done our best to present the information contained in the above article fairly and accurately.  However, hypothetical investment performance is still potentially misleading.  Hypothetical data does not represent actual performance and should not be interpreted as an indication of actual performance. This data is based on transactions that were not made. Instead, the performance is simulated for illustration purposes only, based on knowledge that was available only after the fact and thus with the benefit of hindsight. Results do not include the impact of taxes, if any.  Some investors in UPAL funds may have earned more; other earned less.  A complete list of actual investment performance may be found on the UPAL Web site at under the Investments tab at the top of the screen. Past returns are not necessarily indicative of future results.  Future results will likely vary. These materials are subject to change without notice and, due to the rapidly changing nature of the security markets, may quickly become outdated. All materials and information presented are compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. This information is distributed for educational purposes only, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product or service. Investments are not FDIC-insured and may lose value.