Weekly Global Market Commentary – 5th October 2015

Strong Start in Q4 After Tough Q3 – By Bryan Dooley

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For investors around the world, Q3 2015 turned out to be one of the more challenging quarters in recent history. Since mid-August, global equity market began declining sharply, taking the year-to-date performance on all of the widely-quoted equity indices well into the negative territory for the year.

For example, the Dow Jones Industrial Average is down 8.63% year-to-date through the end of September, marking its third straight quarterly loss. The last time the blue-chip barometer had seen three back-to-back down quarters was in 2009 during the Great Recession. Before that, the last time it occurred was the five-quarter stretch ending in 1978.

This latest selloff was sparked by concern that the slowdown in China would crimp global growth while at the same time the Federal Reserve has begun to signal its first interest-rate increase since 2006. Stocks, commodities and currency fell sharply during the third quarter while bonds managed to eek out only modest gains as credit spreads widened out over the period.

While such broad stock market declines can be unnerving, they do represent a regular component of long term investing. We like to remind our clients that historically the market gives us on average one ten percent correction every year. The long term return on the stock market as measured by S&P 500 is over nine percent annually, but each year or so we have these corrections. Therefore, we still maintain that the present sell off in risk assets falls into the category of ‘normal’ and could actually be considered ‘healthy’ as speculative investors are flushed out.

On the positive side, although emerging markets have been slowing down lately, the U.S. economy continues recovery as evidenced by a strong housing market and steady employment gains – even though recent performance has come up somewhat short of expectations. Meanwhile, Europe also continues to recover although the region’s progress remains somewhat uneven at times. On the commodity front, prices are down across the board; notably, oil prices have fallen to the point of being cut in half since last year. While lower oil and gas prices have received some negative news headlines lately, the reality is that lower energy prices are ultimately good for both U.S. and global profits and growth as lower energy prices effectively represent a tax cut for consumers and many businesses.

Overall, we remain optimistic about higher quality ‘risk assets’ from this point forward, although it could take some time for markets to settle down. Already, risk markets look like they want to rally this quarter as demonstrated by last Friday’s major stock market reversal and a brisk rally starting out this week.

Most importantly, we continue to take great care in establishing high quality positions in securities backed by solid companies. It is our experience that, over the longer term, fundamentals prevail over short term market volatility. Market volatility remains at present remains elevated and driven by the whims of mass psychology which fluctuates greatly from day-to-day.

Warren Buffett once said that the stock market in the short run is like a voting machine – tallying up which firms are popular and which are unpopular. But in the long run, the market is like a weighing machine – assessing the substance of a company. The message is clear: What matters in the long run is a company’s actual underlying business performance and not the investing public’s fickle opinion about its prospects in the short run.

The information contained in this article is for information purposes only, and represent the views of the author. It is not intended as specific investment or financial advice, or a recommendation or solicitation to buy or sell any security. Any investments or strategies listed in this article may not be suitable for all investors. Past performance is not indicative of future performance, and as with any investment, prices may fluctuate. It is recommended that advice is sought from a qualified investment professional prior to implementing any financial plan. LOM has made every effort to ensure that the contents herein have been compiled from sources believed reliable, however LOM does not warrant the accuracy, adequacy, timeliness, or completeness of this information expressly disclaims liability for errors or omissions in this information.