Quarterly Market Update

For the past six weeks, markets have traded in correction territory (a correction is a reverse movement of at least 10%). The reversal began in late August, likely due to negative economic data and stock market performance in China. It seemed like the market was beginning to regain its footing until the U.S. Federal Reserve Bank (the Fed) announced on September 17th that they were going to leave short-term interest rates in the 0 to ¼ percent range due to low inflation caused by “recent global economic and financial developments.”

We believe this is a correction in an overall rising market. While the declining price of energy (oil) and import prices are negative shocks in the short-term, they eventually will dissipate and result in more disposable income for consumers. In fact, stronger consumer spending, 2 ¼ percent GDP in the first six months, and solid employment numbers (pace of job gains, unemployment, and so on) led many to believe a September Fed rate hike was going to happen. The Fed clearly affirmed these numbers. Furthermore, bank lending activity reflects more of a growth footing, while strong corporate balance sheets reflect prudent borrowing—not irrational exuberance. Finally, there are numbers coming out of China that indicate the growing Chinese middle class is still consuming. Apple CEO, Tim Cook, recently went on record stating that China is one of its hottest markets and represents a long-term “unprecedented opportunity.” Nike’s strong earnings this past week included a 30% increase in sales year over year in China. Like Apple, Nike executives believe they have major opportunities in China because of its growing middle class, despite the struggling Chinese economy.