The third quarter ended with a bout of volatility in the stock market as investors began to digest both the prospect of the Fed raising interest rates in 2015 (the date is still being debated) and the rapid rise of the U.S. dollar compared to our major trading partners. A pick-up in economic growth has been building since the end of the brutal winter, meanwhile, both Japan and the Euro Zone have embarked on more aggressive monetary policies to spark their moribund economies. (Both programs are emulating the Fed’s “quantitative easing” program of the past three years that is ending in October. The U.K. also had its own “QE” program that is completed.) Neither Japan nor the Euro Zone have the same economic flexibility as the United States, and their efforts will likely take a longer period of time to see significant results. But, it’s a good sign that growth in two of the largest economies is bound to pick up.
The impact on the financial markets has been to drive Japanese and European interest rates well below those prevailing in the United States. The attached graph shows long-term interest rates across several countries.
Much of the current volatility in U.S. stocks can be traced to the higher dollar. Many of the larger U.S. companies in your portfolio have significant foreign sales and a lower dollar helps price competitiveness. So the fear is international sales will suffer from the higher currency. We view the higher dollar as a long-term positive for the stock market, as the strong market gains in the 80s and 90s were in strong dollar periods. “Strong dollar, strong markets” is a mantra we have not heard in a long time.
The late summer, early fall has traditionally been the stock market’s weakest period. The market has been remarkably volatility-free for over two years and the current spasm would normally be considered business as usual. We may see more volatility until prices fall to a level that generates buying enthusiasm. In the meantime, please feel free to call us with any questions.