Current Thinking

3rd Quarter 2015 Economic & Market Review

Economy
China continued to dominate the global economic and investment headlines for the third quarter (“3Q”) as the country devalued its currency and its stock market plummeted in the wake of slowing growth and uncertainty in the country. This had a ripple effect across the globe, including in the U.S., and the Federal Reserve (“the Fed”) left interest rates unchanged at its September meeting (and, subsequent to quarter-end, at its October meeting) citing external risks to growth, stock market volatility and sustained low U.S. inflation expectations. Interestingly enough, the Fed changed its focus late in September and downplayed the importance of slowing growth overseas while conveying the message that it expects to begin the interest rate normalization process prior to year-end.

Equity Markets
Global equity markets experienced significant downside volatility for 3Q and are negative for the year-to-date (“YTD”). The S&P 500 Index, primarily representative of domestic large-cap U.S. stocks, lost 6.4% in 3Q (-5.3% YTD). Mid- and small-cap stocks, represented by the Russell Midcap and 2000 Indexes, respectively, declined 8.0% and 11.9% and have experienced losses of 5.8% and 7.7% for the YTD. From an investment style perspective, results were mixed in 3Q with growth defending better than value in large-cap, parity in mid-cap, and value ahead of growth in small-cap; however, growth has significantly outperformed for the YTD across the market cap spectrum. Meanwhile, overseas markets experienced even larger declines than the U.S. with the MSCI EAFE Index (representing large-cap international stocks) down 10.2% (-5.3% YTD) and emerging markets (MSCI Emerging Markets Index) falling 17.9% (-15.5% YTD).

Fixed-Income Markets
Bonds were relatively strong for the quarter – the yield on the 10-year Treasury note declined to 2.06% from 2.35% at the beginning of the quarter and, remarkably, finished at a lower level than where it began the year (2.17%). The Barclays Capital (“BarCap”) U.S. Aggregate Bond Index (representing investment grade U.S. bonds) returned 1.2% (1.1% YTD) and the long end of the curve recovered following a difficult first-half of the year with the BarCap Long Treasury Index surging 5.1% (0.2% YTD). Cash continued to yield near 0.0% at the end of 3Q.