As we watched events unfold during the 3rd quarter, we are reminded of the items discussed at our last Round Table Discussion (RTD) event in April. While the world was focusing on Greece during the early part of the year, we had already turned our attention towards China and identified concerns surrounding their corporate debt bubble and transparency issues. When the volatile stock market in China took center stage, growing concerns about China’s GDP growth and its possible negative impact on economies worldwide spilled into other stock markets in Europe and the U.S. driving equity prices down to “correction” levels.
The DJIA dipped briefly below our support level of 16,000, representing a drop of approximately 13% off recent highs. Recall that we lowered our support level from 16,400 to 16,000 in April due to weakening fundamentals and reiterated that such a drop was actually healthy for the stock market. Moving forward, the unknown is the direction of future adjustments made to this support level based on fundamentals. So far, the variables we monitor are mixed and are also influenced by the stronger dollar’s impact on earnings.
Regarding China’s outlook, their government must recognize that massive fiscal spending on infrastructure projects in the past cannot support sustainable long term economic growth and continuing with such projects can only add to the bubble already created. The continued focus on possible solutions is evidenced by their President’s recent visit to meet with industry leaders here in the U.S. seeking additional foreign investment. Of course, the recent devaluation of their currency has made this a more valuable proposition. We’ll continue to monitor the impact of these meetings.
This wouldn’t be a market commentary without feedback on interest rates. Our short comment on interest rates should reflect the amount of attention this deserves. We believe there is no need to raise interest rates in the near future but “lift off” should be executed to make this a non-issue moving forward.
A recent quote from another financial institution, “Flat is the new growth” is consistent with our outlook. We remain cautious in our allocation decision and our focus on dividend yielding stocks/mutual funds/ETF’s should provide income with appreciation potential. We believe such investments may also provide some downside protection within certain trading ranges but understand that many of these large cap domestic companies have exposure to a stronger U.S. dollar. Please contact your consultant should you have any questions regarding our thought process and your portfolio.
Our next RTD event scheduled for October 21st will include intriguing topics of discussion such as the Gini Coefficient of Inequality and our concept of “Involuntary Protectionism”. Please contact Leslie Tritschler at 484-320-6300 if you are interested in attending.
In closing, I’d like to officially welcome Bob Habig and Michelle Siano to our team. As a firm, we do not actively recruit advisors, but when exceptional individuals such as Bob and Michelle come to our attention, we realize that such additions can truly benefit our clients and our firm. Please visit www.ellisinvestmentpartners.com for more information on our new team members.