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September 2015 Market Update

The US equity market has started the recovery process from the correction which began last month. But we don’t believe stocks are off to the races, as there are still plenty of potential speed bumps along the road. Valuations have improved somewhat, although not to the point that equities should be considered cheap; monetary policy remains accommodative in the United States, and highly-stimulative in Europe, China and Japan; and the US economy continues to grow at a steady pace. But the volatility associated with interest rate uncertainty is likely to persist.

Year to date, only large growth equities are positive and only by .09%.  International equity markets are all negative except for Japan with .21% increase in its market.  Still, the S&P 500 is above correction territory as defined by a 10% reduction from the high.  We don’t hit a bear market until a 20% reduction at 1,704.  The Dow Jones Industrial Average significantly underperformed the S&P 500, losing 8.63% year to date.  It’s been 283 days since it passed 18,000, a longer time than all but two other milestones over the past 20 years. Another worthy note is of the 30 names in the index only seven are positive year to date.  Exxon Mobil and Chevron are among the worst performers.  Nike is the best.  Momentum to the upside is lacking.  We believe energy has been oversold especially mid-stream MLP’s.  We believe international developed markets and emerging markets can benefit from a growing US economy and a rising dollar.  And, eventually, the tide will turn and small cap US equities will become attractive.

The question is can the US economy grow enough to avert continued declines in the market?  We think so.

Underlying the view that the bull market is not over is the continued growth in the US economy. The manufacturing sector, as well as multi-nationals, have been hit double-barreled by China’s growth slowdown and the dollar’s strength. The manufacturing sector is only about 12% of the US economy though; with the services side representing the other 88%. Here the picture is much brighter. Associated with that strength is the improvement in housing—which is increasing its weight in the economy—and job growth.

Uncertainty surrounding the Federal Reserve continues after its punt of rate hikes at its most recent meeting. However, as the market gets more clarity on monetary policy and given a still-growing US economy, the bull market should slowly reestablish itself, albeit with bouts of volatility. Further support should come from global growth in areas that are net beneficiaries of the plunge in commodity prices.

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