October 2015

Unabated Volatility

25th Anniversary

As you can see from the new letterhead we are celebrating our 25th anniversary. We want to thank all of our clients and friends for making this possible.

SEI Clients

I am happy to say, that for our SEI clients, we have finally been able to get SEI to take the client fees from their accounts monthly instead of quarterly. With most of our other clients we have been taking fees out either daily or monthly for some time. This is a big improvement since use of “dollar cost averaging” is beneficial both when funds go in and when they come out. This change should produce smoother investment flows over the course of the year.

The Summer of Discontent

After a period with little volatility during the first two quarters, the third quarter saw a great deal of volatility. The markets like to have a clear view in the economy, in the political arena and with interest rates. None of this was clear during the last quarter.  

The Markets

The third quarter began with the S&P 500 at 2063.1. At the end of the quarter the S&P 500 stood at 1920. This is a drop of 6.9% during the quarter and proved to be one of the worst quarters in a long time. Since the beginning of the year, when the S&P 500 stood at 2058.9, the market has dropped 6.7%.  Volatility brought the range in the S&P 500 from a high, on July 20th, of 2128.3 to a low, on August 25th, of 1867.61. This is a swing of 260.7 points or about 14% during the quarter. It was not smooth sailing, with fluctuations occurring daily from late July until the quarter’s end. Since that time, the volatility seems to have subsided and the market has been moving back up.


With the substantial fall in stocks, other asset classes did not fare as poorly. With this said, making money in the third quarter was extremely difficult. The key was to be diversified, so that an investor was not focused on one asset class. We have always told our clients that diversification was important, but in this environment, while it helped, it did not necessarily mean gains in accounts.  Stocks were down, bonds were down and many alternative investments were down too.

The Economy

As the quarter developed, the economies in many other nations were not growing or were growing at very slow rates.

The announcement by the Chinese government that their economy had slowed down by a considerable amount did not sit well with markets around the world. The growing fear was for the impact on businesses’ earnings potential and the ability of companies and governments around the world to be able to make debt payments.

With these doubts, world stock markets took a dive. Although the U.S. economy appeared to be growing, the fear of the impact from other nations on the U.S. brought turbulence to U.S. markets as well.  

The Federal Reserve

The Federal Reserve (Fed) met in the middle of September. Since early June, market watchers anticipated that the Fed would raise the short-term interest rate.

As the date of the meeting approached, with world economies seemingly in bad shape, there was a changing expectation that the Fed would not raise rates. The Fed did not raise rates and the stock markets went into a swoon. The S&P 500 dropped 113.5 points, or 5.7%, between the time of the announcement, on September 16th and September 28th.  Although Fed members said they believed the U.S. economy was doing reasonably well and laid out all that was good in our economy, their vote seemed to tell the markets this was not the case.


In late September the Federal Government was going through another daring dance with the budget. What was looming was the prospect that, once again, Congress would allow the government to shut down. As so often happens, at the last minute, they decided to fund the government temporarily. What they did was to “kick the can down the road” until early December. A shut down right around the holidays could make consumers fearful of spending money. This could really slow down the economy, if it happens. We also have the deficit ceiling looming, which will need to be addressed in mid-November.

This is the stuff that shakes up the markets. 

What Happens Now?

Many shocks impacted the markets and the thinking of economists in September. Slow world-wide growth was a seemingly new event to the markets. Most economists had been indicating slow growth for months. The U.S. is seen by most economists as the growth engine of the world at this point.

The stability of the U.S. means that people and companies from the rest of the world are putting their funds in U.S. Treasuries. This has made the U.S. dollar stronger, relative to other currencies, and made U.S. exports more expensive.

Low oil prices caused many oil companies to close facilities and lay off workers both here in the U.S. and elsewhere. While this was bad for oil workers, it meant that manufacturing, service industries and individuals were paying much less for energy.

During August and September we witnessed an increase in consumer spending. This is likely happening for a number of reasons. With unemployment at 5.1% we have nearly full employment. Many of the workers who have been hired during the past year are beginning to feel secure in their new jobs. Workers who had been wondering if their jobs were safe now feel better about their employment. We are seeing workers quitting jobs and seeking better employment.

This is good news because more people are working and feeling good about their employment, and are more likely to spend more. More jobs mean more tax revenue and reduction of the U.S. deficit. Fewer unemployed workers mean that hiring will require firms to raise salaries to get good workers. With more consumers spending, more goods and services will be sold, leading to higher profits.

Interest rates are staying low. This has been a boon to the housing and real estate markets as mortgage rates are at an all-time low. This sector has been helping to boost the economy for the past several quarters.


The rest of the world sees the U.S. as the best economy. We have a tendency to beat ourselves up and expect more. I’ll stick with my prediction from July: Assuming no unforeseen circumstances, I think the fourth quarter will be the beginning of sustained growth into 2016.

Ed Mallon

Posted October 30, 2015 2:30 PM