Download third quarter 2015 update 10/15/16

THIRD QUARTER 2015 UPDATE
10/15/16
The Third Quarter of 2015 proved to be a very turbulent time for the stock market. Major averages posted
the worst quarter in four years with the Dow Jones Industrial Average declining -7.6% and the Standard
and Poor’s 500 Index declining -6.9%. Year-to-date the indexes are down -8.6% and -6.7%, respectively
while the US aggregate bond index is up +1.13%.
The markets were hurt this quarter over the concern that the slowdown in China and the emerging
markets, which together account for 40% of world Gross Domestic Product (GDP), would cause recessions
in the developed economies of the United States, Europe and Japan. Before we can say that the recent
decline is predicting a recession, a number of reliable economic indicators would have to change quickly.
These leading indicators are stable and not flashing warning signs, which support the view that the risk of
a recession is relatively low.
The market volatility with large up and down swings is consistent with the bottoming process, which we
feel should occur during the fourth quarter. Barron’s noted in a recent article that, “Times like these often
provide the most fertile ground for investment opportunity.” We agree with this statement and have
positioned your portfolio to capitalize on the opportunity created by this sell-off. In July and August
leading up to the correction we sold certain investments to lock in profits and minimize losses. By raising
cash we’ve reduced risk and preserved capital. Although we can never time when the market will bottom
(or top), we turn to technical indicators, historical prices and valuation metrics for re-entry points. Our
strategy has been to dollar-cost average back into the market with limit orders for strong companies at
attractive prices. Going forward, we will continue this strategy and buy into weakness. However, we still
remain cautious until the bottoming process takes its course.
We want to stress that the sky isn’t falling and our economy isn’t as bad as the stock market might indicate.
In fact, the U.S. economy is improving with the 2nd quarter GDP revised up to +3.9%. The automotive
industry is on pace to have its best year of sales in 15 years with over 18 million vehicle sales on an
annualized rate. New home sales are trending higher, and existing home sales have recently experienced
a sharp upturn. Average hourly earnings increases have improved to 2.2% year-over-year and the
unemployment rate is down to 5.1%, placing consumers, who account for 71% of GDP, in a position to
spend. Low oil and energy prices are a boon for the consumer and should continue to fuel economic
growth here in the U.S. The bull market that begin post the great recession in 2009 is still intact as interest
rates remain ultra-low and the U.S. economy continues to rebound.
It is noteworthy that this correction has shifted investor sentiment towards fundamentals based on sales
and earnings growth instead of speculative investing fueled by monetary accommodation from the
Federal Reserve. The fed held off on raising interest rates at its September meeting, but is likely to raise
rates either later this year or early 2016. Improving cash flows, share buybacks and rising dividends should
offset any downdraft from interest rate increases and lead the market higher in 2016. In addition, low
interest rates will support stock market valuations and provide a better risk/reward vs. other asset classes
(i.e. 10-year bonds paying 2.00% and money market accounts paying 0.10%). Abroad, the fundamental
outlook seems to be improving as central banks in Europe and Japan continue to implement quantitative
easing programs and pump liquidity into their systems.
In summary, there are a large number of companies that remain in excellent financial and operational
condition. This correction is not being driven by weakness in the economy or a contraction in earnings,
but a perception of a global slowdown. As mentioned in our mid quarter update published on August
24th, we must stay patient with a diversified portfolio and a long term investment outlook. A lot of this
sell-off was not due to fundamentals but emotions. Investing with emotions and getting caught up in the
short-term market noise usually leads to selling low and buying high – the opposite reason for investing!
Together with our guidance and strategy we will take advantage of this short-term pullback and achieve
long-term success.
Sincerely,
Ken Hartley
President
Hartley Advisors Corp.
215-801-4830
[email protected]
Tom Hartley
Vice President
Hartley Advisors Corp.
610-331-4292
[email protected]