October 4, 2016

Central Banks Upset Quiet Third Quarter

Markets were relatively calm during the third quarter of 2016, yet they delivered some attractive returns overall.

In the United States, all three major U.S. indices posted record highs twice during a single 7-day period in August, reported CNBC.com. The Standard & Poor's 500 Index (S&P 500) experienced a 51-day streak without at least a 1 percent decline. The index returned 3.3 percent in the third quarter.

Investors were fairly complacent until comments by Federal Reserve officials raised awareness the Fed might raise rates during 2016, possibly as early as September. The S&P 500 lost 2.5 percent and the VIX, known as the market's fear gauge, rose 40 percent in a single day. The upheaval was short-lived and U.S. stocks rebounded quickly.

World markets were moved higher after the Fed opted to maintain its current policy.When the European Central Bank did the same - choosing not to implement further stimulus measures - markets moved lower. Markets were also less than enthused with the plans put forth by the Bank of Japan (BOJ). The central bank will attempt to control the yield curve by keeping 10-year Japanese government bonds at zero percent.

The BOJ's goal is to push inflation to 2 percent, reported Reuters. However, some analysts believe the new policy may be less accommodative than the old one. Experts cited by Financial Times said, "On the face of it the BOJ has arguably, by setting the [Japanese Government Bond] curve at its current level, just announced a modest tightening in monetary conditions relative to where they were in the summer."

Speculation about a September rate hike caused many emerging markets, which have been top-performers throughout the year, to give back some gains late in the quarter. When the U.S. central bank pushes rates higher, emerging market assets become relatively less attractive to investors seeking yield. In addition, a rate hike tends to strengthen the U.S. dollar, inflating the value of dollar-denominated debt held by emerging countries and potentially slowing economic growth.

Brazil has been a top performer during 2016, despite recession and political upheaval. President Dilma Rousseff was impeached in September. Her successor, Michel Temer plans to enact fiscal reforms he hopes will bring about a mild economic recovery by 2017. Director of Latin America Strategy for Templeton Emerging Markets Group Gustavo Stenzel explained, "We believe Brazil offers a salient example of how political change can accelerate a turnaround in an economy and stock market."

Worries about China's economic stability receded during the quarter, Reuters explained:

"Recent economic data has shown signs of recovery in China's economy. Industrial sector profits jumped 20 percent in August, the best showing in three years, while a Reuters poll showed manufacturing sector activity likely expanded modestly for a second straight month in September. But many investors remain skeptical about the sustainability of a recovery that they believe has depended on government stimulus."

At the end of the quarter, emerging markets moved higher after OPEC announced a preliminary agreement to limit production. It was the first production cut in eight years. The agreement boosted oil and energy stocks in countries around the world.

The fourth quarter of 2016 may be a bumpy one. The U.S. election has the potential to cause some upheaval, as does a rate hike by the Federal Reserve.

Weird Science Reigns at the Ig Nobel Prize Awards

Laugh then think - HARDER. The Ig^® Nobel Prizes were awarded last week. The prizes celebrate some of the most imaginative, unusual, and peculiar scientific achievements of the year. For 2016, the winners included:

• Economics: Journalism and marketing professors from New Zealand and Britain for their work in marketing theory. The winning paper was entitled, "The Brand Personality of Rocks: A Critical Evaluation of a Brand Personality Scale."
• Physics: A slew of Hungarian, Spanish, Swedish, and Swiss researchers for dual discoveries. They explored and confirmed the reasons that white-haired horses are the most horsefly-proof, as well as the reasons dragonflies are fatally attracted to black tombstones.
• Chemistry: A certain German automobile manufacturer for "...solving the problem of excessive automobile pollution emissions by automatically, electromechanically producing fewer emissions whenever the cars are being tested."
• Medicine: German researchers who authored a paper titled, "Itch Relief by Mirror Scratching. A Psychophysical Study." Apparently, anyone with an itch on the left side of the body can relieve it by looking into a mirror and scratching the right side of the body, and vice versa.
• Biology: A Brit who built prosthetic limb extensions with plastic hooves and wore a helmet to romp and butt heads with goats during the three days that he lived among them. His co-winner was another British Islander who lived in the wild as a badger, an otter, a deer, a fox, and a bird.

The winners' accomplishments were celebrated at Harvard University where winners "physically receive their prizes and a handshake from genuine, genuinely bemused Nobel laureates."

Weekly Focus - Think About It

"I have lived as a badger in a hole in a Welsh wood, as an otter in the rivers of Exmoor, an urban fox rummaging through the dustbins of London's East End, a red deer in the West Highlands of Scotland and on Exmoor, and, most hubristically, a swift, oscillating between Oxford and West Africa...Why I did this is not an unreasonable question. There are many answers. One is that I wanted to perceive landscapes more accurately. We have at least five senses. By and large we use only one of them - vision. That's a shame...I suspect it's responsible for lots of our uncertainty about the sort of creatures we are, our personal crises, and the frankly psychopathic way in which most of us treat the natural world."

—Charles Foster, Ig Nobel Prize winner

Best regards,
Sean M. Dowling, CFP, EA
President, The Dowling Group Wealth Management

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