Several headline grabbing events in the third quarter increased investor anxiety and became challenges for the capital markets. The July 1st Wall Street Journal headline, which came as the Dow Jones Industrial Average (DJIA) benchmark stood at 17,619.51 was “Greek Defaults on Bailout Ahead of Vote”. Investors wondered at the time what impact this would have on global markets and consumer demand. On Tuesday, August 11th China surprised the entire world by devaluing their currency in order to make their goods more competitive with American products in the global markets. The DJIA closed down 212 points to finish that day at 17,402.84. The August 12th headline read, “Strains Mount After Chinese Devalue Yuan”. For the next several days the markets were extremely volatile and lost value hitting a low for the quarter of 15,370.33 on August 24th. Investors struggled with uncertainty as they tried to understand the impact upon their investments and the future earnings power of the corporate securities they held. All of this occurred against a backdrop of turmoil and strife throughout the middle-east and Ukraine. By the end of the 3rd quarter investors had regained some confidence and the DJIA ended the period at 16,284.70, down about 7.6% for the quarter but up 5.9% from the low on August 24th.
The headlines do not tell the whole story, especially for long-term investors. Yes, China’s economy is slowing but it is still growing at above a 6% rate. The U.S. economy measured by Gross Domestic Production grew by 3.9% in the 2nd quarter. Anything above 3% is considered strong growth. Also, the unemployment rate of 5.1% was reported on Friday, October 2nd, which continues to trend down and is below the 5.2% interest rate hike threshold set by Federal Reserve Chairperson, Janet Yellen. Housing starts in September were 1,206,000, 6.5% ahead of revised estimates. Corporate balance sheets are far stronger with much larger cash reserve holdings than where they were in 2008. My advice to long-term investors is to avoid getting caught up in the anxiety and emotion of the daily headlines or try to put them into a proper perspective.
During the 3rd quarter the Standard & Poors 500 (S&P 500) went from an opening level of 2067.00 on July 1st to a close on September 30th of 1920.03, a decline of 7.1% during the quarter. In the first 19 days of the 4th quarter the S&P 500 has rebounded 5.9%. We are still down from the start of the 3rd quarter 1.6% but the anxiety level has dissipated significantly and the focus is shifting back to traditional measures such as earnings. On a year-to-date basis the S&P 500 is off just 1.2%, beginning the year at 2058.90.