Markets across the board were ugly in the third quarter, particularly in September. Diversified investors likely feel there is nowhere to hide, as practically all major asset classes had significant losses for the quarter. Large cap US stocks were down, small cap stocks were down double-digits, emerging markets were crushed, down nearly 20% for the last three months. Developed international markets were also down, off just over 10%. The US energy sector continued to slide as well. US bonds held their own, with the Barclay’s Aggregate Bond Index up 1.23% for the quarter. Real estate also outperformed most other asset classes, actually up 0.30% for the past three months.
While the global economy outside of the US is showing signs of weakness, particularly in emerging markets (including China), most major US economic data is surprisingly positive. The job market continues its late-cycle tightening. The number of people voluntarily quitting their job (and therefore feeling optimistic about prospects for other work) continues to rise:
As the unemployment rate continues its slow but very steady tick downward, currently at 5.1%:
The American consumer is doing exceptionally well. The Conference Board consumer confidence measure reported in September was up to 103, up again from a sharp uptick in August. We may be finally seeing the positive effects of lower gas prices, as September reported auto sales from most major manufacturers were well above estimates. Fiat Chrysler sales jumped 14% and GM gained 12% with Ford light-vehicle sales up 23% and Nissan sales up 18%. It is also worth noting that thanks to rapid deleveraging after the 2008 recession and falling interest rates, the average American household is using less disposable income to make debt service payments than any time in recent history.
The US construction economy, including residential building, again showed signs of strong growth. Private market residential construction spending has grown at a 14% annualized rate.
Major market jitters this quarter have been attributed to a perceived slowdown in China’s economic growth. Of course there is always widespread speculation about the Chinese economy because generally speaking, the official numbers can’t be trusted. The Chinese government has taken unusual steps this year to boost economic growth, including (finally) devaluing the Yuan and reducing interest rates. It seems clear that Chinese manufacturing is slowing and possible contracting, but it is important to also recognize that the Chinese economy is slowly moving from a production-oriented environment to a consumer-led one. And let’s not forget that an improving US consumer situation, a stronger dollar and lower commodity prices may very well lead to increased consumption of goods manufactured in China.
Ultimately the global economy is a wildly complex place, and our feeble attempts to predict what comes next are bordering on laughable.
Tax & Legal Updates
It has been very quiet out of Washington DC this summer with little regulatory or legal news. Of course, the arrival of the fourth quarter means it is time to start thinking about year-end planning items, including:
- If you are the beneficiary of an inherited IRA or over age 70.5, required distributions must be made before December 31st. (If you are a client, don’t worry, you’ll hear from me soon about this!). As of early October 2015, congress has NOT re-authorized the allowance to make your required distribution directly to a charitable organization.
- If you intend to make any charitable gifts during 2015, it’s time to get organized, especially if those gifts are in-kind donations of investments. Planned non-charitable gifts (such as those to family) to be made under the annual exclusion limit (again $14,000 for 2015) must also be made before December 31st.
- 529 contributions eligible for a state income tax deduction must be made before December 31st to have the deduction apply to your 2015 income taxes.
- If you are self-employed and considering an Individual 401(k) for 2015, it must be established before December 31st.
- Open enrollment for private health insurance policies under the ACA for 2016 begins November 1st. If you are self-employed, a small business owner or a pre-Medicare retiree, you will want to be ready to evaluate any possible changes to your coverage in the next few months.
- For those considering a Roth IRA conversion, the deadline is December 31st.