Alas, the third quarter has closed and we are in the home stretch of 2016 although it seems like the year just got started. In general, the 3rd quarter had something for everyone. The Brexit concerns of late June and early July quickly faded as markets rebounded and the typical summertime doldrums ensued. In September we were reminded that markets can move down although the month ended with little change. The S&P 500 Index of large United States companies ended the quarter up 3.86%. International markets represented by the MSI EAFE Index were also up 6.44. Lastly, the Barclays Aggregate Bond index was up very slightly at 0.46%.
To what do we owe the stock market’s resiliency to? Mainly, to world’s central banks keeping low (or negative) interest rate policies. Low interest rates prompt investors to put money into the stock market that might have gone to the less costly bond market if interest rates were higher, thereby supporting a bull market. The theory is that increased market values will create a wealth effect that accelerates the economy. This has been an effective strategy so far as GDP growth in United States has slowly crept upward. Next month’s corporate earnings reports may cause investors to pause.
The US Federal Reserve is starting to sound like the boy who cried “wolf” as it has been threatening to raise interest rates 0.25% for the past year. With each Fed meeting the rate increase gets pushed out for a few months. While the Fed is not supposed to be political, the sense is that they will wait till after the November elections and increase rates in December. My opinion is that a rate increase is important in order to reduce the long term negative impact of the Fed keeping interest rates artificially low.
As markets enter the home stretch of 2016, expect the unexpected. Valuations in both the stock and bond markets are elevated and while they may continue to grow, they deserve close watch. We will continue to take profits on appreciated assets and to reinvest in assets that have a good value. With every decision we lean toward the more defensive approach.
Please feel free to call me regarding you portfolio any other financial concerns you may have. Thank you for your continued trust and confidence.