Market Commentary: Market Recap

Market Update for the Month Ending September 30, 2016

Mixed markets to end the quarter
U.S. equity markets bounced back to close September with mixed results. The Dow Jones Industrial Average lost 0.41 percent for the month, but the S&P 500 Index and Nasdaq posted gains, up 0.02 percent and 1.96 percent, respectively. For the quarter, the Dow was up 2.78 percent, the S&P 500 gained 3.85 percent, and the Nasdaq, again delivering the best performance, was up 10.02 percent. Overall, these results represent the best quarter of the year for the U.S. stock market.

Though market performance was strong, fundamentals weakened, as earnings continued to disappoint. According to FactSet, as of September’s end, third-quarter earnings are expected to decline 2.1 percent, which is down from the 0.3-percent gain estimated at the end of June. This continuing weakness is worrisome because fundamentals ultimately drive market performance.

Technical trends remained positive throughout the quarter. All three major U.S. indices finished the period above their 200-day moving averages.

Developed international markets performed well during the month and quarter. The MSCI EAFE Index ended September up 1.23 percent, capping off a quarterly 6.43-percent gain. Technical trends also stayed positive, with the index above its 200-day moving average throughout September.

Emerging markets also performed well, as the MSCI Emerging Markets Index was up 1.32 percent for the month and 9.15 percent for the quarter. Technical signals were positive for the entire quarter, with the index remaining comfortably above its 200-day moving average.

Fixed income posted mixed results for the month and quarter. The Barclays Capital Aggregate Bond Index was down 0.06 percent in September and gained 0.46 percent for the quarter. U.S. corporate high-yield bonds, as reflected in the Barclays Capital U.S. Corporate High Yield Index, performed well, up 0.67 percent in September and 5.55 percent for the quarter.

U.S. economic data also mixed
Both the ISM Manufacturing and Non-Manufacturing indices declined in September, with the manufacturing index retreating into contraction territory and the nonmanufacturing index hitting a six-year low. But not all business news was bad. The National Association of Home Builders survey beat expectations for September and reached its highest point since October 2015. The improvement indicates that home builders are increasingly optimistic about the future of the housing market.

Home builder optimism was driven by strong consumer demand and sentiment. Consumer confidence hit post-recession highs, as illustrated in Figure 1. This improvement could bode well for increased household spending heading into the fourth quarter and 2017.

Figure 1. Conference Board Consumer Confidence, 2007–2016

Much of the gain in consumer confidence was engendered by continued job growth, as a healthy 151,000 jobs were added during August. Personal income also grew in August; one of the most impressive headlines released was a 5.2-percent annual increase in real median household income.

Despite weak business sentiment, as expected, the Federal Open Market Committee kept interest rates unchanged at its September meeting. Moreover, the committee’s discussion of the economy was largely positive.

Risks are still present
International risks were largely subdued in September. Although there are causes for concern—with problems at Deutsche Bank at the top of the list—other issues such as Syria and China have receded as immediate threats.

The largest risk to U.S. markets heading into year-end may be the presidential election. Polls show both major candidates with a chance to take the White House. Because of the policy differences between the candidates, consumers and businesses may be delaying spending and investment until they see what happens.

Long-term prospects still attractive
Although there are catalysts for market volatility in the near term, the U.S. economy is growing and remains among the strongest in the world. The healthy increases in job and wage growth have helped provide a solid foundation for the recovery and signal that growth, though perhaps at low levels, is likely to continue. Nevertheless, as always, a diversified portfolio and long-term view still offer the best route to reach financial goals.

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 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 Dow Jones Industrial Average is a price-weighted average of 30 actively traded blue-chip 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.

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