Since June 4th of this year the stock market has risen almost 16% as the rally from the end of the second quarter has continued throughout the third quarter. This has occurred even as we have seen mixed economic data. Consumer sentiment has improved, as has the housing market. The employment situation has continued to be very uneven although the new jobs trend is upward. We are also seeing a spike in the negative to positive corporate earnings ratio which usually alerts us to a market selloff, at least in the short term. Bonds have held their gains for the year as interest rates have stayed at very low levels.
The third quarter saw an additional round of quantitative easing (QE3) by the Federal Reserve. This is the fourth Fed action since late 2008 and is an attempt to boost the sluggish economy by lowering interest rates. The hope is that an improving economy will lead to more job creation. Results, so far, have been mixed. While the economy is producing new jobs the rate of job creation is well below that of most recoveries. An overall lack of optimism about the future seems to be keeping business from investing for the long term by hiring new people. It is a classic chicken and egg problem: Are jobs created as a result of a good economy or is the economy good because of jobs being created?
The big event of the fourth quarter will be the presidential election, which is always a source of uncertainty for the markets. One of the most common questions we get leading up to an election is which election outcome will be better for the markets. Good question. Since 1871 (Before this, the U.S. economy was largely agricultural) stock market performance has been nearly identical under Republican and Democratic administrations. Looking at shorter times frames give us similar results. The bottom line is, despite all of the rhetoric, companies are able to produce earnings equally well regardless of who occupies the White House. Stock market cycles are long term and largely beyond political influence.
The rally we have had the past three and a half months, coupled with some challenging economic conditions, will likely lead to a volatile stock market for the remainder of the year and could very well lead to lower stock prices by the end of the year. Looking beyond that it is difficult to make predictions for the stock and bond markets. While there are areas to be concerned about, we see nothing that leads us to make any major changes to our asset allocation at this time. If you would like to discuss your portfolio please do not hesitate to contact us.
About Wabash Capital
Wabash Capital is an employee-owned registered investment advisor based in Terre Haute, Indiana, providing investment advice and professional portfolio management to individuals, corporations, banks, trusts, retirement plans and endowments. To learn more about our business, please visit www.wabashcapital.com.