October Economic Outlook - Sumner Wealth Management



Economic Outlook

October 2015



Dear Visitor,

September Market Recap

September was a tough month for the global stock markets – a bad finish to the worst quarter in four years. The overall U.S. stock market (Russell 3000) lost nearly 3% last month. Large-cap stocks (S&P 500) lost 2%, while U.S. small caps (Russell 2000) lost nearly 5%. International stocks (MSCI ACWI ex-U.S.) also lost ground with developed economies (as expressed by the MSCI EAFE Index) losing 5%, and emerging market stocks (MSCI Emerging Markets Index) losing about 3%.


Diversifying asset classes, such as commodities (Bloomberg Commodity Index) and alternatives (Morningstar Diversified Alternative Index), also lost ground last month, dropping about 3% and 2% respectively.


The traditional diversifier, the bond market (Barclays Capital Aggregate Index), bucked the trend and gained nearly 1% last month; the U.S. Treasury bond yield ended the month at 2.04%. The bond market finished the quarter with a positive return, and is also positive for the year and the last 12 months. Bonds have now outperformed stocks in each of these time frames.


Treasury Bonds Rally as Stocks and Commodities Sink

Are more losses ahead? In short, if one knew nothing about market history, seasonal patterns, or valuations, it’s just good practice for investors to expect short-term losses and volatility but positive long-term gains. That’s why money needed for near-term liabilities should never be invested in the stock market.

Still, what’s the market likely to do in the months ahead? From a seasonal perspective, the stock market is now entering the strongest time of the year. In fact, October is often called the “bear market killer.” Of course, this is no guarantee of gains – the last quarter of 2008 is one good counter-example. But it suggests the near-term odds (and of course long-term odds) recommend remaining invested and staying the course with an appropriately balanced portfolio.


So, why is the stock market down? Popular explanations for the recent losses continue to include the concern that the Chinese economy is slowing (it is, but overall growth is still very strong), and the Federal Reserve (Fed) will raise short-term rates (it hasn’t, but it eventually will). Both theories are very well known and, quite frankly, overrated.


What’s not overrated, however, is that corporate earnings have been falling for some time and are now negative year-over-year. Corporate profitability is what investors should be interested in and focused on in the near term.


Currently, only 37% of publicly traded companies have increased their revenue forecasts over the last two

quarters – the fewest companies to increase their forecasts since 2009 and nearly as few as the worst of the dot-com bust in 2001. Median sales growth estimates for the next 12 months are currently just 4% compared to the historical growth rate of 7%.


My expectation is that earnings growth in the U.S. will eventually settle into a below-average range, albeit positive, just like the overall economy. The leading reason, in my opinion, is overall growth prospects will remain challenged due to high overall debt levels (both government and corporate) within the economy. Historical studies (i.e., Reinhart/Rogoff) have shown that highly indebted countries tend to have below-average economic growth. In fact, back in 2011, Reinhart and Rogoff were expecting 10 years of slow growth. So far, their outlook has been accurate – and it’s reasonable to expect it to remain so moving forward.

Meanwhile, we continue to expect that better growth in the year(s) ahead will be found in international economies and markets.Though favoring international has not benefited CLS portfolios in recent times, international markets still offer better growth prospects, lower valuations (i.e., they’re “on sale”), and have more accommodative central banks. Thus, our return expectations for international stocks remain substantially higher than U.S. stocks in the years ahead, and we continue to have strong conviction tilts toward them.


Index Returns (%) 

Source:  Bloomberg



1 Year

 Dow Jones 30



 S&P 500



 Russell 2000






 S&P GS Commodities



 U.S. Trade-Weighted $




Market Performance

1Russell 3000 2S&P 500 Index 3Russell 2000 Index 4MSCI ACWI ex-U.S. Index 5MSCI EAFE Index 6iShares MSCI Emerging Markets Index 7Barclays Capital U.S. Aggregate Bond Index 8Barclays Capital 1-3 Month U.S. Treasury Bill Index


Stock Market



YTD ‘15

3 YR

Total U.S. Market1





Domestic Large Cap Equity2





Domestic Small Cap Equity3





International Equity4





Developed International Equity5





Emerging Market Equity6





Fixed Income



YTD ‘15

3 YR

U.S. Bonds7





Cash Equivalent8







Global Economic Malaise has the Fed's Attention


Minutes released from the Fed's September 16-17 meeting showed that while the U.S. economy may have warranted an increase in short-term rates, concerns over a global economic slowdown gave the Fed cause to pause. Nowhere has the possible contagion from a global economic malaise been more prevalent than in manufacturing. For example, the Institute For Supply Management's (ISM) manufacturing survey in September fell to 50.2, its lowest level since May 2013. While not flashing a recessionary signal yet (greater than 50 indicates expansion, less that 50 contraction), trends in manufacturing tend to lead the broader economy, despite manufacturing's share of the economy having shrunk since the 1970s. Indeed, four of the ten components in the Conference Board's Leading Index are related to manufacturing. Next week's economic data feature many key manufacturing releases, including industrial production for September and our first look at regional manufacturing activity in October with the Philadelphia Fed Business Outlook survey.



Equities certainly ha 


Welcome New Clients to Sumner Wealth Management            

Linda C.


Kent P.


Nancy R.


To my clients, friends, and colleagues. Thank you for your continued support!  I would like to   hear your thoughts and feel free to forward this on to other individuals who could benefit from this information.


Sumner Wealth Management       

Mark Sumner, Financial Advisor  


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