Market Commentary: Market Recap
Market Update for the Quarter Ending September 30, 2015
U.S. markets weak
September was a weak month for U.S. markets, with the Dow Jones Industrial Average, S&P 500 Index, and Nasdaq down 1.35 percent, 2.47 percent, and 3.27 percent, respectively. All three indices also posted losses for the quarter, as the Dow, S&P 500, and Nasdaq dropped 6.98 percent, 6.44 percent, and 7.35 percent, respectively, leading to the weakest quarter since 2011.
Monthly weakness was driven by fundamental and technical factors. Per FactSet, at September’s end, the estimated earnings decline rate for the third quarter was 4.5 percent—well below the expected 1–percent decline forecast as of June 30. Technical factors that led to weakness included the S&P 500’s strong drop through the 2,000 level in August and its inability to recover in September.
International markets suffered much more than U.S. markets. The MSCI EAFE Index declined 5.08 percent in September on growing political stress around Europe’s refugee crisis. For the quarter, the EAFE was down 10.23 percent.
Emerging markets performed worst of all, with the MSCI Emerging Markets Index down 3.26 percent for the month and down a significant 18.53 percent for the quarter. In addition to the troubles in Europe, China’s growth continued to slow, damaging its markets and the economies of emerging markets dependent on its growth.
Unlike equities, core fixed income showed a small gain in September, with the Barclays Capital Aggregate Bond Index up 0.68 percent, taking the quarter to a small 1.23–percent gain. The Barclays Capital U.S. Corporate High Yield Index, however, lost 2.60 percent for the month and 4.86 percent for the quarter on weakening credit conditions in energy and materials.
U.S. economy shows signs of slowing
Good news for the U.S. economy continued in September, but signs of slowing growth were evident. Positive data points included rising auto sales, as illustrated in Figure 1, and very strong results from the service sector. Personal income and spending also showed reasonable gains.
Figure 1. Light–Weight Vehicle Sales, 2006–2015
Source: U.S. Bureau of Economic Analysis
Other news was mixed. New home sales continued to grow at a strong rate, and confidence in the homebuilding industry set a new high, but existing home sales declined. Retail sales grew less than expected.
Job gains were well below expectations, at 142,000, far less than the 200,000–plus levels of recent months. But other metrics were strong, with a record number of job openings posted and initial jobless claims remaining low.
Consumer confidence showed mixed results for September. The University of Michigan Consumer Sentiment Survey dropped from 91.9 to 85.7, though the Conference Board’s Consumer Confidence Survey, released later in the month, showed an unexpected increase.
Given the signs of a slowdown and risks elsewhere, the Federal Reserve decided to postpone any rate increase—a somewhat surprising decision that rattled markets.
Investors pull back as risks rise
September is historically a difficult month, and that has been the case this year, particularly in international markets. Although the U.S. has suffered less damage so far, we have experienced declines and been exposed to growing geopolitical and economic turbulence; consequently, although the U.S. recovery will likely continue, it could be at a slower pace.
Looking ahead, we can expect markets to adjust to lower growth rates and companies to adjust their expectations. Investors with properly diversified portfolios have enjoyed the market run–up of the past few years and should be prepared to take any downturns in stride. On balance, more turbulence looks possible, but the U.S. remains well positioned for the future, and U.S. investors should continue to participate in the growth.
All information according to Bloomberg, unless stated otherwise.
Disclosure: Certain sections of this commentary contain forward–looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward–looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets. All indices are unmanaged and investors cannot invest directly into an index. The Dow Jones Industrial Average is a price–weighted average of 30 actively traded blue–chip stocks. The S&P 500 Index is a broad–based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. The Nasdaq Composite Index measures the performance of all issues listed in the Nasdaq Stock Market, except for rights, warrants, units, and convertible debentures. The MSCI EAFE Index is a float–adjusted market capitalization index designed to measure developed market equity performance, excluding the U.S. and Canada. The MSCI Emerging Markets Index is a market capitalization–weighted index composed of companies representative of the market structure of 26 emerging market countries in Europe, Latin America, and the Pacific Basin. It excludes closed markets and those shares in otherwise free markets that are not purchasable by foreigners. The Barclays Capital Aggregate Bond Index is an unmanaged market value–weighted index representing securities that are SEC–registered, taxable, and dollar–denominated. It covers the U.S. investment–grade fixed–rate bond market, with index components for a combination of the Barclays Capital government and corporate securities, mortgage–backed pass–through securities, and asset–backed securities. The Barclays Capital U.S. Corporate High Yield Index covers the USD–denominated, non–investment–grade, fixed–rate, taxable corporate bond market. Securities are classified as high–yield if the middle rating of Moody’s, Fitch, and S&P is Ba1/BB+/BB+ or below.