After peaking in the third week of July, the S&P 500 bounced around until the middle of August when it made a significant drop. It was followed by a sharp bounce at the end of August and started toward recovery when a sharp sell off at the end of September took the index back to October 2014 levels. The following are performance numbers from various popular indexes. Index numbers are not individually comparable to a properly diversified portfolio. Each portfolio may include an allocation to securities similar to these indexes in varying amounts based on your personal risk tolerance and should only be compared in that context. Year to date as of 9/30, the S&P 500 reflected a decline of 5.29%. The Dow Jones Industrial Average was down 6.95%. Small company stocks represented by the Russell 2000 Index ended down 7.73%. International equities as represented by the MSCI World Ex U.S. Index were down 6.69%. Emerging markets fared much worse with the MSCI Emerging Market Index down 15.27%. Fixed Income as represented by the Barclays Aggregate Bond Index closed up 1.13% for the year.

Dominating the financial news this past quarter were a China slowdown, the U.S. Federal Reserve with the on-going interest rate saga, and a renewed slump in commodities. All of these impacted equity returns globally as well as in the U.S. more recently. The U.S. economy held up relatively well as evidenced by a second-quarter rebound in GDP that came in as better than expected and with the consumer continuing to do well along with housing contributing materially in the growth of our economy. Consumer confidence also surprised on the upside with a strong number.

China, the worlds second-largest economy has slowed down from over 10% five years ago down to just being shy of 7% currently. This slowdown had been forecasted. China faces transition issues from a developing economy that is investment centric to a domestic oriented economy that hopes to become more consumption oriented. This will create significant challenges and pressures. In hopes of softening the landing, the Peoples Bank of China have started using their reserves in attempts to boost the economy and financial markets and have used various means to inject liquidity into their banking system. China now accounts for 15% of global GDP and about half of global growth. On the rest of the global front, the Eurozone has been improving. Elsewhere around the world, growth remains uneven with much of the emerging markets which are commodity driven left in a difficult position. The U.S. economy remains sound but overseas concerns can undermine domestic confidence.

The Federal Reserves much anticipated decision on September 17 was to keep interest rates unchanged given global growth concerns and the fact that inflation remained below the 2% target despite a strengthening job market. This postponing on the part of the Fed may seem to have to appeased financial markets only briefly. In the process the Fed may have injected some amount of uncertainty for investors and businesses about the future. This seemingly limbo situation with rates is likely to continue to contribute to market volatility, particularly in absence of more clarity from the Fed. Many feel that the Fed has missed its window of opportunity to raise rates early this year as it would prove more difficult to do at this juncture. This assessment of course is with the benefit of hindsight. There is also the fear of the unknown with regard to the impact of raising rates as some fear that it may expose or burst perceived bubbles in the fixed income arena among others. Keep in mind a bubble is only known to be a bubble after it has burst.

Despite these many concerns, the U.S. economy continues to grow at a decent pace while inflation remains under control. Given the recent drop in U.S. equities, the U.S. equity market does not in our view reflect an overvaluation nor warrants further correction from these levels. Obviously investor sentiment plays a very important role in the short term and will tend to not only override fundamentals, but potentially create a negative feedback loop that is based on investor emotions and the level of confidence they have at a moment in time. Despite a more cautious outlook, for the sake of the longer term, history teaches us that one should always remain invested.

We are thankful for the opportunity to serve you. Have a wonderful Fall!