Third quarter marked by mixed data and volatility.
Last quarter, many investors watched closely as the Greek debt drama played out on a global stage. Three months later, investors once again are warily watching how international economic conditions impact domestic markets. Headwinds include worries over slower growth in Europe and Asia; the effects of lower commodity prices; uncertainty over the Federal Reserve’s rate tightening policy and timing; suppressed inflation; and the potential for a U.S. government shutdown either at the beginning of October or during early December.
At the end of the third quarter, uncertainty and volatility had taken their toll on the three domestic indices – the S&P 500, the Dow Jones Industrial Average and the NASDAQ – each down around 7%. The global EAFE index lost the most ground this quarter, slipping just over 10%. The domestic financial markets were particularly on edge in the last week of September, as biotech and small cap stocks stumbled, although the domestic indices perked up a bit on the last trading day of the month, curtailing some of the losses seen earlier.
In other news, reports showing that American and European consumer confidence rose more than expected in September helped pare some of the losses experienced during the last weeks of September. Another report showed increasing property values for homeowners and improving demand, and second quarter GDP growth was revised upward to 3.9%, as expected. American spirits also were buoyed by improving employment opportunities and a resilient labor market. And, lower commodity prices should afford consumers more spending power to help keep the U.S. economy edging forward despite turmoil and slowdowns elsewhere.
The Fed’s decision not to raise rates at its meeting in September spurred speculation that the world’s economies aren’t recovering as well as previously thought. So naturally, attention turns to the timing of the first rate move. Most economists expect to see rates rise in December in line with indications from Fed officials, but federal funds futures seem to indicate an increase in early 2016, according to Bloomberg. The central bankers are once again taking a wait-and-see approach to ensure the economy develops as predicted.
While nominal wage growth has remained unimpressive, real wage growth (reflecting the drop in gasoline prices) has been substantial. In the first half of the year, consumers may have doubted the staying power of low energy prices – but the added purchasing power should continue to support consumer spending growth into the important holiday shopping period,” noted Raymond James Chief Economist Scott Brown. “A long-lasting decline in energy prices is also beneficial to the outlook for car sales and housing activity.”
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