The stock market suffered its worst quarter since 2011. The S&P 500 Index, declined 6.4% in Q3 2015, after experiencing a 5.3% drop in the month of September alone. Even the usually durable NASDAQ was down 7.1% in Q3, seeing its first down quarter after a 10 consecutive quarter winning streak. But the U.S. markets had plenty of company, as most global markets sold off as well. The only positive asset class for the quarter was bonds, up 1.2% (Barclay’s Aggregate Index), as investors fled to safety. Bond assets were also helped by the fact that the Fed failed to take action in September and did not increase interest rates as anticipated.
Surveying the global financial landscape, what were the factors that contributed to the worst quarter in four years and what does the market have in store for investors going into the end of the year?
China – Topping the list of market woes is China, which is clearly experiencing an economic slowdown, but just how slow is still unclear. China’s main stock market, the Shanghai index, posted its worst quarter since 2008, and its smaller Shenzhen index, the worst in at least 20 years. China’s surprise devaluation of its currency in August, heightened fears that the slowdown in the worlds #2 economy may be even worse than official government economic data reveals. All of this is particularly bad news for the rest of the global economy who has grown reliant on Chinese demand for their exports. A China slowdown also has investors concerned about the potential impact on corporate earnings.
Oil and Commodity Prices – A major side effect of slowing China demand has been a steep decline in commodity prices. WTI Crude oil was down 25% in Q3, posting its worst quarter since Q4 2014. Energy was the worst performing sector in the S&P 500 Index this quarter. Gold was down 4.8% in Q3, as it and non-precious metals like Copper and Zinc sold off as well.
U.S. Interest Rates – Will they or won’t they? That is one question that abounds and is fueling market uncertainty. Will the Fed raise interest rates for the first time in 9 years by year end? Most market analysts had expected the Fed to raise rates in September. Only two meeting dates remain: October 28th and December 16th. Based on last Friday’s weak employment numbers and continued global economic weakness, the markets no longer seem to be pricing in Fed action this year. Traders now are pricing in about a 34% chance the central bank will raise rates this year, down from about 45% prior to the jobs report.
Market Outlook for Q4
So what is in store for financial market for the remainder of the year? The fourth quarter is traditionally seasonally strong. But there is obviously a lot going on in the global markets. Earnings season is about to commence, so a lot will depend on corporate earnings as the market’s focus shifts from global to domestics concerns. All eyes will also be on the U.S. economy and whether or not the Fed will take rate action before the end of the year despite growing concern the domestic economy is slowing along with the rest of the world’s.
So how did these trends translate into client performance for the quarter?
With the global equity markets down in Q3 across the board, the only safe haven in client portfolios was bonds and our bond managers did an excellent job in navigating the interest rate volatility during the quarter, posting positive returns. While bond exposure helped mitigate the losses on the equity side, it was still a rough quarter from a performance perspective.
In these volatile times it is important to remember, that investing is a marathon and not a race. And while all of this market turmoil is unsettling, over the long-term, a balanced, diversified approach tends to prevail. As always, EQM Capital is committed to helping you manage your assets successfully today in order to help you achieve your goals for the future.
Stocks Regain Momentum in July
U.S. investors who remained calm in the face of the Greek debt crisis saga and a sell-off in the Chinese stock market were rewarded with the biggest monthly stock market gain since February.
The S&P 500 Index advanced 2% in July helped by good corporate earnings from companies like Google, Amazon, Chipotle, and Netflix. Thankfully the situation in Greece appears to be coming to a positive compromise that does not involve an exit from the euro. U.S. markets also managed to brave a 14% tumble in China’s Shanghai Composite Index.
As Global Turmoil Settles Down, Earnings Prevail
So now that the global market turmoil has calmed down, the focus is back on the domestic picture, namely corporate earnings results and the timing of a Fed interest rate increase. About two-thirds of companies in the S&P 500 have now reported, with 74% beating earnings estimates and 50% topping sales estimates. While the earnings picture is not all rosy, Apple uncharacteristically missed estimates on slowing iPhone sales, much of the earnings weakness is the result of a strong dollar overseas and weak energy prices.
Commodity Prices Plummet
Slowing growth in China, the world’s biggest consumer of raw materials, is bad news for commodity prices like energy and mining. The Bloomberg Commodity Index declined a whopping 11% in July, the biggest decline since September 2011, trading to a 13-year low.
Uncertainty Breeds Optimism
The good news is that the uncertainty created by weakness in the global economy and by continued disappointing wage growth here in the U.S. has increased the likelihood that a Fed rate increase is not imminent. All eyes will be on next week’s job report for clues as to whether the Fed will feel comfortable raising rates in September.
|Index||Friday’s Close||Week’s Change||% Change
|S&P MidCap 400||1502.03||24.29||3.41%|
06/05/15 – 11:04 AM EDT
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The first quarter of 2015 was marked by lots of ups and downs due to fluctuations in oil prices, currency, and interest rates. Here’s a recap of the quarter in five easy charts. A picture is worth a thousand words!
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