Fall is here with its summer-ending cooler weather and shorter days. I like fall, and all the hiking and outdoor activities that come with it. But I must say that I will miss summer, especially after the absolutely beautiful summer we had. Sandra and I enjoyed it immensely. I hope you all had equal opportunity to enjoy the summer and now to enjoy fall to its fullest.
The picture in the upper-left corner is from our August vacation. It is a great image of our happy family. We rented a house in the Adirondack mountains in the small town of Keene, NY. The area is very peaceful and relaxing, which is exactly what we need from our vacation. Sure, we do some hiking, but once we get back to the house we can grab something to eat, read, or take a nap if we fancy. The TV didn’t get turned on during vacation, and I didn’t miss it in the least. A great vacation, we are very lucky indeed.
Last Quarter Round Up
Last quarter I said that I was concerned about market volatility as we move closer to the U.S. presidential election and deal with post-Brexit uncertainties in the International markets. The markets were more volatile…fortunately in the positive direction. This past quarter did not follow the sideways market I’ve been talking about for some time. The S&P 500 was up +3.9 for the quarter and is up almost +8 for the year. International markets were up +6.4 for the quarter and +1.7 for the year. Emerging markets had a great quarter up +9 and up +16.3 for the year. For a welcome change, global markets are beginning to see capital flows and rising investments. The bond market was up about +0.5 for the quarter and is up nearly +6 for the year. Volatility was very noticeable, both up and down, in the month of September. We’ll see what it’s like going forward.
Once again the Federal Reserve (Fed) chose to not raise interest rates in September. Thus, interest rates remain very low as does economic growth in the U.S. and around the world. Slow growth is a worrying condition because it suggests recession is just a small, negative adjustment away. It has sparked decidedly anti-trade rhetoric both from the U.S. presidential candidates and other global leaders. This concerns me. I understand trade can create painful challenges for some individuals, but studies have shown that on whole, trade is good for an economy. I hope this type of protectionism doesn’t go beyond the rhetoric stage.
Current Quarter Outlook
With the U.S. market up nearly 8 YTD, we are clearly outside of my “normal” sideways market movement of 3 to 4. Though this may signal the end of the sideways market, it’s nowhere near certain. I see plenty of opportunity for negative market adjustments around the time of the U.S. presidential elections in November. I can easily imagine a 5 pullback that would make today’s market seem quite sideways. Only time will tell for sure, but I’m not quite ready to move away from my protective hedges just yet. I’m still thinking we are in a sideways market.
I fully expect the Fed to raise interest rates in December. The conditions look very much like last December when the Fed raised rates 0.25, if only to substantiate the near-constant rhetoric about interest rate normalization. The Fed is balancing the reasonable idea of interest rate normalization, with the fact that other major economies are lowering interest rates, even going negative.
Looking ahead, while I admit we are overdue for a recession and could see one in 2017, it seems to me we will likely continue with the slow-growth conditions. However, recession isn’t hard to get to when your current annual growth rate is only slightly above 1. What worries me are the U.S. presidential election results, protectionist trade policies, and more uncertainty coming from Europe as they struggle with Brexit and overall political fracturing. My equity strategy is to remain fully invested, neutral on the U.S., underweight International but adding to Emerging Markets. In fixed income, I remain invested with greater exposure to credit paying higher yields. I will continue my overweight in Alternative investments that offer hedging protections.
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This newsletter is for general information only and should not be considered investment advice. Investors should consult with a trained investment professional to discuss their particular situation.