It was surprising to see fall leaves scattered across green lawns the last couple of weeks and realize that summer is coming to an end. Hopefully you and your family were able to enjoy the long days of sunshine and warm weather in a season that has gone far too quickly this year. Welcome to our third quarter newsletter. We thought it would be a good time to reach out and give you an update on our thoughts.
This election year is providing endless material for late-night talk show hosts, YouTubers, and columnists. In spite of the daily rhetoric, we wanted to express our thoughts on what this year’s election might have in store for markets and what markets are generally signaling to us today. While much could change in the coming weeks, as well as after the election when Congress has its say, the reality is that markets anticipate outcomes. When candidates propose policies that are off the beaten path, it tends to raise the level of uncertainty in the markets. Heightened uncertainty typically creates more market volatility than we’re accustomed to, just as in the case of Brexit.
Over recent weeks, volatility as measured by the VIX (Chicago Board Options Exchange Volatility Index) or the so called stock market “fear gauge,” hit its lowest level in years. The stock market is currently signaling “little” to “no fear” or maintaining status quo. We suspect this is simply the calm before the storm, given the level of macroeconomic and political uncertainty we currently face. It’s a struggle to recall a time when voters have been this negative toward both nominees. We expect the closer we get to the election, the more volatility the markets will exhibit. No matter which candidate wins the election, volatility associated with the election will eventually abate as checks and balances of a divided government limit policies that the president could implement. The Federal Reserve has clearly telegraphed lower rates for a longer period, but is poised for another small rate hike in December. Domestic growth is continuing at a steady pace, unemployment is low, consumers are strong, and we still face little inflationary pressure at this point.
Both stocks and bonds have performed well recently. Stock indexes are at all-time highs, suggesting optimism over growth and inflation, but bond gains suggest just the opposite. Either could be right, but what we are gleaning from markets is that this is a particularly risky time to overload any one type of investment. It is important to have a well-diversified portfolio—one that includes investments that are likely to benefit in either scenario.
We continue to expect volatility to dominate the markets and US equities to be a top performing asset class. We are beginning to see a slow pick up in US corporate earnings and expect that to accelerate in the fourth quarter for 2016. We remain focused on portfolio diversification and investing for the long term.
Thank you for sharing your financial journey with us. We appreciate you and your business.