Reconciling the Fed and the Economy
The stock market wrapped up its worst quarter in four years. The S&P 500 fell 6.98% for the third quarter. Broad losses hit every category in every major market throughout the world. The S&P 500 staged a 13% fall from its high point in July to the August and September low points. This means the prescribed 10% correction that so many value proponents have called for has finally triggered.
The serious decline in the market in August and September was caused from growing concerns about the health of our economy. During this time, economic indicators began to sag and suggest a slowdown and a possible recession was happening.
Amidst this threatening economic weakness, many people thought the Federal Reserve would raise interest rates. How could the Fed raise interest rates when our economy is getting worse? These fears ripped through the stock market. It was a disturbing backdrop. Solid Fed policy says interest rates should be hiked only during economic strength. For the Fed to raise rates would go against the grain of normal monetary policy.
Even after the Fed acknowledged our economic weakness on September 17th and left rates unchanged, the market continued to weaken because there was so much confusion. It was a brutal period for the stock market since investors were shaken trying to reconcile the actions of the Fed with our economy.
Finally, on October 2, the markets re-aligned when a weak jobs report proved that the Fed had it right all along. The economy WAS weak and deserving of zero interest rates. A zero interest rate policy spells good things for a moribund economy. This accommodating and dovish Fed has reassured investors and, consequently, the market has been rallying this month.
What Will Stocks do in the Final Quarter of the Year?
Will our economy actually lapse into a recession and negative growth? Or will a recession be avoided and the economy will continue its snail-like pace of growth like we have seen over the past two years?
So far, indicators point to our slow growth continuing. There are enough strong components to our economy such as housing, auto sales, and consumer spending. These components serve to offset the stress in beleaguered areas like energy, mining and industrial activity.
So long as our economy does not worsen, the stock market should find enough traction to post gains for the final quarter of the year. It appears the market made a significant low on October 2, and is up about 3% since then.
Forecasting year end, esteemed Goldman Sachs recently revised their target on the S&P 500 from 2100 to 2050. If the market could achieve this recovery, it would mean a 7% lift from September 30th to December 31st. If our client portfolios captured those gains, it would be something to look forward to and result in a very nice quarterly gain for our clients.
Assuming the market will regain the losses from the third quarter decline, our clients need to be investing in stocks with the best chance of hoisting this recovery. Leadership in the market is ragged and not easily decipherable. No single industry stands out and even single companies showing good relative strength seem ready to fall victim to sharp declines. This makes a dicey environment for stock selection.
The relative strength of a select group of companies such as Amazon, Google, Nike, and Under Armor do serve as flags to make a promising watch list for investors. Currently, we are using these signals to reposition our portfolios and own the stocks with the best potential. As a result, and we are adding numerous new companies to our client accounts.
Good money management also involves staying nimble and keeping a sizeable weighting of assets in cash. Cash keeps our clients in a position to buy stocks on the cheap or at opportune times. Cash also dampens volatility in a porfolio.
Our goal and expectation is for client portfolios to recoup the setbacks from the market decline last quarter. This should happen since the confusion about the Federal Reserve raising interest rates in a deteriorating economy has evaporated. Sheesh.
Past performance is no guarantee of future results. Investment management involves the possibility of losses. Significant general stock market moves up and down can influence the performance of client portfolios. Composite returns are based on client portfolios of over $100,000. Not all clients are included in the composites. All returns include the reinvestment of dividends. All returns are net of fees. Composite returns are derived from aggregated, time-weighted returns for clients of Peregrine Asset Advisers. Individual client returns can deviate from the composite returns. While Peregrine uses the S&P 500 as a benchmark, Peregrine does not attempt to mimic the structure of this index. Individual client portfolios vary. The number of securities held also varies per client.
Do you have questions or would you like to know more, contact Dan Botti.