3rd Quarter 2015 Commentary


Worries here, worries there, worries are everywhere and investor sentiment is low, very low.

q3 commentary - photo 1 - 2015

As we are security analysts, not psychoanalysts, it is hard for us to figure from time to time what unnerves the investor “crowd”. There is an “old saw” on Wall Street that Wall Street loves to climb a “wall of worry”.  So it is now that there are “worries” and as such, quite a wall to mount.  To climb our current “wall”, let’s consider the following.

In the U.S. the consumer is “king”, responsible for nearly 70% of Gross Domestic Product (GDP).  In short, how the American consumer goes is how the American economy goes.  You cannot have a “sick” consumer in the States and have a “healthy” U.S. economy.

q3 commentary - photo 2 - 2015

As can be seen by the above, household net worth is at an all-time high ($85.7 trillion).  This is an increase of 30% ($18.9 trillion) since 2007.  Since 2009, leverage has fallen 30%, back to the levels of mid-1980’s.  The American consumer is also upbeat according to the Conference Board whose Consumer Confidence Index increased to 103 in September – a near post-recession high.

q3 commentary - photo 3 - 2015

Job creation has been happening for more than 6 years.  The private sector has created over 4 million new jobs since 2007.  Inflation has only averaged 2% (if that) for the past 10 years and the U.S. dollar is one of the world’s strongest.  Housing starts have been increasing for the past 6 years – but still as a percentage of GDP, residential investment is only 3.3% through Q2 2015 – well below its average of 4.6% historically.

q3 commentary - photo 4 - 2015

If housing, a huge industry in the U.S., were to simply get back to its historical average, this would bode well for the American economy.  Further, the U.S. consumer (as were consumers in most of the world) was helped mightily beginning last year by a dramatic cut in energy prices (-50%).  Early in 2015, it did not seem as though people were spending their “windfall” – perhaps thinking it might not last.  Saving did increase in early 2015 (see following CHART on left).  But now that saving has given way to spending and the largesse is being spread.

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In short, we believe the case has been made for a fiscally fit and confident American consumer.  We note the divergence between investor sentiment (very low) and consumer sentiment (very high) and analytically we come down on the side of the consumer – the driver of the U.S. economy.  Thus there should be little investor worry about a U.S. recession emanating from this “quarter” and we are most of the way to the “top of our wall”.

Shifting gears to the Federal Reserve, twenty-five basis points or a one quarter of one percent change in the fed funds rate is the focus of consternation for bond buyers in the American market.  We are puzzled by the fixation of when the Fed will raise rates.  We have asked companies from various industries as to whether such a small increase or if such an increase in the near term would change any business plans.  The answer has been a resounding NO.  So what gives?  What is the concern?  We understand that simply the change of direction (from lowering rates to increasing rates, no matter how small) is unnerving to fixed income investors.  But if a small upward change in the cost of money is not “rattling” Corporate America – then perhaps Wall Street ought to “get over it”.  Succinctly, we think the U.S. economy is strong enough to take a 25 basis point increase in the cost of money without sending America into a recession.  We are near to the “top”.

Corporate earnings season for Q3 is soon to be with us and this will be the center of investor attention beginning in mid–October, running for a several weeks.  So far in 2015 companies have had to deal with a strong dollar (meaning any corporation with international sales has been handicapped to some extent when translating foreign sales back into dollars) and will have to do so again in the upcoming earnings season.  Further, energy firms (about 10% of the S&P 500) will have another bad quarter because of low oil and gas prices.  It will not be until Q4 when some comparative relief will appear, as energy prices “lap” the first downturn which was in late 2014.  But it should also be noted that so far in 2015, companies have “positively surprised” Wall Street with corporate results.  Cynics will argue that company managements have lowered “expectations” to a level that are easy to beat.  Perhaps so – but the expectations are still surpassed. Imagine if expectations, no matter how low were not beaten?  We expect earnings support for stock prices.  We are getting closer to the “top”.

Uncertainty – markets hate uncertainty.  Investors dislike worry.  Investors want to see a “clear path” to the future.  When the path does not appear evident “walls” of defense get constructed with low asset prices.  As the future becomes clearer, the “walls” get scaled with higher asset prices.  When the Fed raises interest rates for the first time (we are told in 2015) and economies around the world are still standing, investors will climb the “wall”.  When Q3 earnings surprise to the “upside”, investors will take another step up.  The economic fundamentals do not support the investor “funk” apparent today in markets around the world – except in Brazil, Russia and various spots throughout the Middle East, for quite obvious reasons (think oil).  Growth is happening in the U.S., Europe, India, Indonesia, China, Southeast Asia, Africa and this should eventually be reflected in higher asset prices.



  • Housing should expand & support the economy. –  Yes
  • Employment will improve throughout the year. – Yes
  • Companies will raise dividends & buyback stock. – Yes
  • The Fed will keep interest rates lower for longer and raise them slowly,  not sharply later in 2015. – Yes – a bit of a surprise to some that the Fed did not hike rates in September
  • The US, India, Japan, Brazil & Indonesia will accelerate their economic growth. China will not. Europe will try but not succeed. –  Yes & No  – Brazil disappoints with the Petrobras scandal and a recession.
  • Politics in the Eurozone will spark some “fireworks” which will add volatility to markets. –  Yes – Greece has re-elected Syriza & Spain will have elections later this year.
  • The dollar will be strong. – Yes
  • The Euro & Yen will be weak vs the dollar. – Yes
  • A political solution to the Ukraine issue will be found. – No – fighting has quieted, but no political solution
  • The price of oil will start its rally in late 2015. –  Still believe


The opinions expressed in this Commentary are those of Baldwin Investment Management, LLC.  These views are subject to change at any time based on market and other conditions, and no forecasts can be guaranteed.

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