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The third quarter of this year was an unpleasant one for investors.  The stock market had its worst quarter’s performance in four years.  The bond market was very volatile during the quarter as speculation regarding the Federal Reserve’s intentions ran wild.  Bonds ended the quarter with small gains.  The Fed’s decision to keep rates unchanged caused renewed fears that worldwide economic growth is slowing.

The heightened volatility the markets experienced during the first quarter continued during the second quarter.  The stock market was very choppy as fears of an interest rate hike by the Fed combined with mixed economic data to leave investors unsure of what the future holds.  Once again, problems in Greece are causing anxiety around the world as the European Union tries to hammer out a compromise to bail them out of their extreme debt.   With a Fed rate hike looking more likely, bonds sold off across the board causing interest rates to move markedly higher.

The first three months of 2015 were very eventful in the stock and bond markets.  For stocks, January and March both saw declines while February saw large gains.  Stocks ended the quarter marginally higher.  The bond market experienced very large swings as interest rates climbed dramatically in early March and then dropped as the month went on.  For the quarter, bonds also ended slightly higher, despite the volatility.

On the economic front, we continued to see mixed economic data.  Most economists have lowered their forecasts of economic growth as the data suggests the U.S. economy is beginning to slow, at least temporarily.  The one area of the economy that has been stronger than most forecasts has been jobs growth and the overall employment picture.  The jobs numbers released in late February were strong enough to cause the bond market to drop as interest rates spiked on the belief that the Federal Reserve would begin to raise interest rates sooner than expected.  Interest rates dropped throughout the month of March as additional economic data was weaker than expected, leading many to push back the date of the expected rate increases.

With this quarterly letter, our 68th, I wanted to alter the format from our previous 67 letters.  All of our letters have included our thoughts on the markets and a review of the current quarter or year and they have come from the company.  With this letter I wanted to write to you personally as the President of Wabash Capital.

2014 was another positive year for stocks as the U.S. economy continued its expansion.  We have now had six straight years of gains following the Great Recession of 2008-2009.  The bond market rallied following a difficult year in 2013 as interest rates dropped to new lows during the year.  The last half of the year was quite volatile as we saw conflicting economic data.  We expect more of the same in the upcoming year.

Both stocks and bonds experienced increased volatility during the third quarter.  Both markets were negative in July, positive in August, and negative again in September, ending very nearly even for the quarter.  Conflicting economic data, much of which points to a U.S. economy running out of steam, was the primary culprit.  Also causing concern among investors were geopolitical threats in the form of ISIS, renewed military action in the Middle East, and questions about the health of Europe’s economy.  It was, needless to say, an eventful three months.

The second quarter ended with solid gains in both stocks and bonds, even as economic data showed mixed results.  Stocks continue to add to their gains of last year, and bonds have rebounded nicely from a difficult 2013.  While not all economic data support market gains, the economy continues to show slow, steady improvement, which the markets like to see.  A recent headline on the market asked the question, “Why is the stock market so boring?”  We will take today’s boring market over the excitement of 2008 anytime.

Stocks are off to a volatile start in the New Year, as a weak January was followed by a strong February.  March saw lots of ups and downs as the events unfolding in Ukraine surpassed economic news in the U.S. in importance.  When it was all said and done, stocks were able to end the first quarter with a small gain.  The bond market also experienced small gains during the quarter as inflation remained a nonfactor.

2013 was a good year for stock investors and a bad year for bond investors.  Stocks had their best year since 1997, while bonds had their worst year since 1994.  Improving economic data pushed stocks higher while at the same time causing bonds to sell off as long term interest rates moved higher from their historic lows.

The stock market continued its climb during the third quarter, rising in July and September while declining slightly in August. Through September, stocks, as measured by the S&P 500, are up nearly 20% for the year. Bonds rallied during the quarter, reversing course after a big selloff during May and June. Even with this rally, most bond indices remain negative on a year to date basis. Stocks have probably gotten a little over extended at this point and a pullback would not be a surprise during the fourth quarter. Longer term, however, stocks continue to look good, especially relative to bonds.

Despite a late sell off by stocks, the second quarter of the year produced positive returns for the stock market.  The bond market, however, concerned that economic stimulus by the Federal Reserve may be coming to an end, sold off as interest rates jumped.

Many investors are concerned about seeing negative returns in their bond portfolios.  While we never like to see negative numbers on our performance reports, bonds fluctuate in value just like all other financial assets.  We have gotten very accustomed to seeing nothing but gains from the bond market over the years as interest rates have dropped to near zero.  As interest rates move back to a more normal level, bond prices will drop.  When prices drop by more than the bond’s interest rate, you get negative returns.