Global stock markets have advanced significantly over the past three months on the heels of better than expected economic data and corporate profits. Our research suggests that though there may be corrections and pauses along the way, global economies and stock markets are firmly in recovery mode. What can we expect in the fourth quarter and beyond?

Though global stock markets have risen 50% over the past six months, this is not abnormal when compared to past market recoveries. In fact, most recovering markets will make up all of their previous losses within 24 months. This would be an additional 50% advance from current levels within 18 months. We know that history does not always repeat itself and that the events of the past two years were extraordinary — however, these statistics tell us that market recoveries can be very powerful and have significant longevity. Given the possibility that this recovery becomes de-railed, keep in mind that we continue to employ our risk management tools which include your portfolio’s overall asset allocation, sector exposure and the use of stop loss orders. Stop losses are not used on all positions — only those we feel would be vulnerable in a deteriorating economy. Additionally, stop losses are placed in such a manner that they can weather a normal correction and only be executed when a stock falls more than usual — ideally to stop the “catastrophic loss” — but not sell given normal stock market volatility.

October has a long history of volatile stock markets and the coming month may not be an exception. The recent rise in stock prices is welcome, but has been at a pace that may not be sustainable without a pause or a correction along the way. Recent political events in Iran, as well as upcoming corporate profit reports may add to this volatility. We would welcome any future volatility as an opportunity to add more stock exposure to your portfolio. There are many great companies that we find attractive and a temporary price reduction would be a fine opportunity to add to your existing positions or add new stocks. Keep in mind that if the market were to decline in October, it will likely be nothing other than a normal correction — not the beginning of a dramatic decline. In case our research and strategy is incorrect, we do have stop losses in place to help protect against significant market downturn.

In recent weeks, interest rates have declined. However, we see a rising interest rate environment over the next 3-12 months that will allow us to lock in attractive yields in the bond market over the next few quarters.

We hope that this short note finds you well. Please feel free to contact us with any questions or to set up a time to review your portfolio.

Sincerely,

James E. Demmert
Managing Partner