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Quarterly Commentary, Q3 2015

Benchmark Returns for the Period Ended September 30, 2015

Annualized
Quarter 1 Year 5 Year 10 Year
US Treasury Bills (one month) 0.00% 0.01% 0.04% 1.22%
Barclays Capital US Gov’t/Credit Inter Bond 0.95% 2.68% 2.42% 4.17%
Standard & Poor’s 500 -6.44% -0.61% 13.34% 6.80%
Russell 1000 Value (large cap value) -8.39% -4.42% 12.29% 5.71%
Russell 2000 (small cap) -11.92% 1.25% 11.73% 6.55%
Morgan Stanley Europe, Australia and Far East (EAFE) -10.23% -8.66% 3.98% 2.97%
Wilshire REIT 2.88% 11.66% 12.52% 6.81%

Quarterly Commentary

Despite being plagued with uncertainty and market volatility, the third quarter provided moderate economic growth in retail consumer spending and housing, and an increase in the Consumer Confidence Index. The US labor market had mixed results with the unemployment rate dropping to a near-normal 5.1% but with significantly weaker than expected jobs growth and labor force participation. Job openings reached their highest total in 15 years while the participation in the labor force dropped from 62.6% to a near 40-year low of 62.4%. GDP advanced in the second quarter by an annualized rate of 3.9%. However, overall economic growth likely slowed to between 1% and 2% in the third quarter.

Inflation remained low and below the Federal Reserve’s 2% target. In September the Fed announced it would continue its “wait and see” approach and held interest rates steady for the 6th straight year. In past comments, the Fed focused mainly on the labor market. This time, however, they pointed to other factors that impacted their decision: lack of inflation, strength of the dollar, and global economic and financial issues. While China’s economic woes certainly played into the Fed’s decision, it is important to remember that China’s economy makes up just 2.6% of the MSCI All Country World Index. Despite the Fed’s concerns, most signs indicate that a rate hike is imminent.

Nearly all segments of the equity market experienced quarterly declines. The Dow lost -7.60% in the third quarter, and the S&P 500 declined -6.44%. Domestic small cap and international stocks fared the worst with the Russell 2000 losing -11.92% and EAFE posting a loss of -10.23%. Domestic REITs proved to be one of the only asset classes that was positive for the quarter. REITs saw a slight comeback of 2.88% from their previous quarter’s loss of -9.93%.

The dramatic intraday price swings we’ve seen in the markets can be unnerving. During a single trading day in August, the Dow temporarily shed over 1000 points and ended the day down 588 points or -3.5%, while the S&P 500 gave up 77 points or -3.9%. This was the worst one-day point loss for the Dow since August 2011, but hardly a “crash.” Looking at it in terms of a percentage drop instead of a point drop helps us put this event into perspective. “Black Monday” of 1987 saw the Dow fall 22.6%. A comparable point drop in today’s numbers would amount to a loss of 3700 points. There have been six other occasions when the stock market declined by 10% within a span of a few days. In every instance the market was in positive territory one year later. The S&P 500 has gained 220% between March 2009 and the August 2015 decline. Giving back 6.44% during a quarter is never pleasant, but it is not a significant concern.

With the recent passing of baseball great Yogi Berra, one of his famous quotes seems appropriate: “It’s tough to make predictions, especially about the future.”

PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. Indices are not available for direct investment; therefore their performance does not reflect the expenses associated with the management of an actual portfolio. The index returns above assume reinvestment of all distributions. This information is for educational purposes only and should not be considered investment advice or an offer of any security for sale.