Market Matters: 4th Quarter Outlook

Below is a weekly update from our Chief Investment Officer, Dr. Scott Lummer. He co-hosts an audio segment entitled “Market Matters.” In this week's show, Scott reviews capital market performance over the past quarter, and provides his outlook for the economy and markets for the remainder of the year. Each week he covers a different piece of investment news focusing on recent events in the capital markets, and relates them to Savant Investment Group’s perspective on investing.

Episode Transcript:

Daphne: Welcome to Market Matters, a weekly discussion about investing in today’s capital markets. I’m Daphne Feng and this week we will discuss the outlook for the economy and capital markets for the remainder of the year with the Chief Investment Officer of Savant Investment Group, Dr. Scott Lummer. But first, let’s review performance for the 3rd quarter. Scott, how did the markets perform?

Scott: It was a mixed performance. U.S. large company stocks increased in value by 1%, but other sectors of the stock market fell in value – small company stocks by 5%, developed international stocks by 6%, and emerging market stocks by 2%

Daphne: What about bonds?

Scott: Bonds were flat – they returned a scant 0.2%.

Daphne: And I know the stocks have become very volatile in October.

Scott: Yes – for example, U.S. large company stocks have fallen 5% over the first two weeks of the market. And as of yesterday, the 11th, we’ve already had 7 daily swings of 1% or more this month – that’s more daily movements of more than 1% than we had in the previous five months combined.

Daphne: Wow. Will that volatility persist?

Scott: That’s a great question. On the one hand, we know that increased market volatility often

leads to further increased volatility. But two weeks is a very small sample. There have been many other two week periods when volatility has spiked up, and then faded away. In fact, that happened twice this year – in late January and early February, and then again in April. So I’m not ready to call this a permanent state.

Daphne: Three months ago you said you felt the economy was in a strong position. Is that still the case?

Scott: Even more so. The unemployment level dipped to 5.9%; the first time it’s been below 6% since the recession. And GDP worldwide seems to be improving. The global Purchasing Managers Index, a leading indicator of growth, has been at a consistently high level the past few months, with the U.S. leading the way. Even countries that have were thought to be in dire trouble a few years ago, like Spain and Ireland, are showing signs of growth. And one important factor in the U.S. economy is the low use of debt, both by businesses and individuals, meaning there is less risk.

Daphne: What about interest rates? Will they remain low?

Scott: Probably in the short-term. But not over the next few years. The Federal Reserve’s own forecast of the Fed Funds rate shows it rising by 3.5% over the next three years.

Daphne: That doesn’t sound good for bonds.

Scott: No it doesn’t. I don’t think that intermediate and long-term rates will go up as much, but they will likely increase. But as we discussed a few weeks ago, the movement of interest rates over the next couple of years isn’t as much of a concern if you are a long-term bond investor.

Daphne: And what about stocks – will the recent slide continue?

Scott: The recent decline isn’t based on long-term economic fundamentals. It’s been driven by more short-term effects – unrest in Hong Kong, fears of Ebola, etc. So I don’t think we will see a continued drop in stock prices. But in the short-term, anything is possible.

Daphne: Last quarter we talked about the possibility of a 10% market correction. You said that it was likely sometime in the next five years, but you couldn’t say when. Is that still the case?

Scott: Yes. We could be in one now – we’re already half way to 10%. But I think way too much attention is paid to the potential of a market correction. If the economic fundamentals are solid, and they are, if you’re investing for the long-term, a short-term correction should not concern you. As a history lesson, in the five years between 1995 and 1999, there were three 10% market corrections. Three of them – the largest being 19%. And yet, because of a strong economy, stocks increased their overall value 2 ½ times – an annual return of over 28%. So if you stayed out of the market because you believed correction was imminent, you would have been right, but a lot poorer.

Daphne: That’s Market Matters for this week. Thanks to all of you for listening. Please join us next week Scott and I will talk about specific end-of-year investment strategies.

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