Commentary on the Market: 3rd Quarter 2015

Ruben’s Commentary on the Market

Third Quarter Update 2015

As mentioned in prior updates, the expectation of volatility returning to the markets delivered with a bang. Since bottoming out in 2009, the Standard and Poor’s 500 stock market index has trended upwards for more than six years with only minor corrections – or more clearly defined as smaller pullbacks from market highs. Most recently we experienced a more dramatic pullback of the index of over 10%. This drop of more than 10% clearly defines a formal correction. When this happens, there are significant events or concerns that precipitate a move that was already in the making. In this particular instance, there has been concern over China’s economic engine slowing significantly along with other foreign markets showing sluggish growth.

Stock market corrections are hard to understand. They often happen in the middle of a long term bull market. Why in the middle of a bull market? Is it simply fear of heights or maybe a reality check on excess optimism? It could be both. However, an explanation which I believe is logical and that I have repeated for many years pictures a runner completing a series of races, one after another. The runner can exert significant effort and energy for a limited period of time before needing to stop, rest and replenish the necessary nutrients needed to prepare for the next race. The stock markets are no different. They need to stop, reflect and prepare for the next leg. We have seen many corrections over our investing lifetime. I feel that this correction of 2015 is no different and I expect stocks to continue back toward new highs.

There are several items that will play a role as to where our economy and the stock markets will take us in the year to come. We will hear much in the short term future about the impact that China’s slowing economy will have on not only the U.S. economy but also on the economies of its trading partners. We will continue to wait for news regarding when the Federal Reserve Bank will raise interest. We will watch the strength of the U.S. dollar against other currencies and we will track the unemployment rate in the U.S. All of these factors will play a role going forward.

Although China is making some attempts to re-energize their economy through supporting domestic infrastructure projects and further providing much needed liquidity to their stock markets, the process will not be rapid. China will need to provide more financial transparency to all of its trading partners as it seeks to portray itself as a trustworthy partner.

The Federal Reserve Bank will raise interest rates in the near future. The impact will be limited as the actual size of the hike should be small at best and not an explosive rise. Further hikes will take place over several years in tandem with our growing economy. The strength of the U.S. economy and the continued growth in employment will be the driving factors the cause the “Fed” to act to raise rates. The U.S. dollar will in all likelihood find a base sometime within the near future. It appears that it will be close to the $1.10 vs Euro where it currently stands. The stabilizing dollar value should allow our trading partners to become more comfortable over time with consistent pricing of goods and services.

The U.S. unemployment rate has dropped dramatically over the past few years and currently sits at 5.1%. Many economists consider an unemployment rate of 4% to be full employment, given that a portion of the population will choose not to pursue full time employment. The falling unemployment figure will eventually have a noticeable impact on growth within the U.S. economy. To put it in simple terms, the more people that are employed and spending money, the greater the demand will be on manufacturers and service providers to sell goods and services. Ultimately, the economy grows and the stock market rises.

The impact of the preceding factors will not occur overnight. However, I am confident that we will see progress before long. I expect continued volatility in the near term with a positive mood going into 2016.