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The recent soft jobs numbers are unlikely to produce panic at the Federal Reserve about the health of the jobs market, but the report does reduce the likelihood the central bank will raise interest rates at its policy meeting later this month perhaps not for the remainder of the year. Do you think that the Fed will actually ‘Go Grinch’ and hike rates in a very thinly traded month of December? There is just no way that they could talk the world into raising interest rates until sometime in 2016. The bond, currency, commodity and global equity markets could not handle a year-end hike.

J.P. Morgan thinks that the Fed has now “moved the goalposts”…
The path forward for stocks just became a lot less clear. The monthly jobs reports, heretofore considered the preeminent eco report, were just downgraded in importance as Yellen implied the Fed was now comfortable allowing the UR to undershoot their objective. “Global economic and financial developments” appears to be the new policy gating factor but that amorphous and vague phrase is much harder for investors to assess (esp. since its difficult to argue that EM/China growth trends deviated dramatically from their months/years-long deceleration path in Aug and thus the Fed really appears to be just trying to placate financial markets). If the Fed found it difficult to hike in Sept., their decision won’t get any easier later this year. (JPMorgan)

For the 3rd quarter rising rates and wider spreads caused negative returns for most bonds. Long-duration bonds had the largest decline. Lower-credit-quality categories outperformed as higher coupons helped offset rising rates. The Barclays U.S. investment-grade bond index turned negative for the year to date. Yields remain well below their historical averages, though credit spreads have moved closer to average, providing more attractive valuations.

There was little distinguishable performance between cap and style during the second quarter, although small-cap and growth stocks remain the biggest out-performers year to date, and real estate investment trusts (REITs) experienced a sizable sell-off amid the rise in long-term interest rates. Domestic-oriented sectors (such as health care, consumer discretionary, financials, and telecom) generally outperformed as the U.S. economy remained on a steadier path than many other economies.

The global expansion remains sluggish, but better conditions in several major developed economies underpin a modestly improving outlook. Europe continues to gain traction in its mid-cycle reacceleration, the U.S. is solidly mid-cycle, and Japan has entered a tepid early cycle along with monetary stimulus and a weaker yen. China has slipped into a growth recession.

The major headline for the 3rd quarter was: Equity Prices Decline over Concerns of China Slowdown
International equity prices declined during the month of August as investors became increasingly anxious about potential interest rate hikes by the U.S. Federal Reserve and further growth slowdown in China. U.S. GDP growth for the second quarter was revised higher and the labor market continued to strengthen, increasing expectations that the Fed will be forced to raise rates sooner than later. At the same time, investors became less optimistic about the Chinese government’s ability to support the economy and equity markets. Though the Chinese economy expanded 7% annualized during the second quarter, some of the subsequent data trends have been more subdued than expected. Uncertainties about Chinese economic growth outlook led to increased volatility in emerging market equities, especially countries in Asia and Latin America that export to China. Markets in Europe were less affected as the Euro-zone economy continued to show signs of revival, helped by the bond purchase program of the European Central Bank.

For those in the energy industry, they are about to get a rude visit from their bankers…
Every April and October, financial institutions reassess how much they’re willing to let oil companies borrow, based on the value of the oil and gas they hold in reserve and can afford to drill on their properties. This corporate line of credit, called a borrowing base, replenishes as a borrower pays back the balance. Unless oil prices rise over the next few days, Zions Bancorporation, parent company of Houston’s Amegy Bank, will value oil reserves at $37.50 a barrel in its oil loan assessments, well under the $50-a-barrel marker it used in the spring, Zions President and Chief Operating Officer Scott McLean said at an industry conference last week. (HoustonChronicle)

Q3 was an ugly one for Active Portfolio Managers according to JPMorgan…
J.P. Morgan notes Q3 was a tough one for active managers. Active manager performance suffered in Q3 with only 33% of mutual funds beating benchmarks during the quarter (vs. 56% in 2Q15). As for YTD, 35% are beating compared to 29% one year ago. Sector positioning explains recent active manager underperformance. In Q3, mutual funds have been favoring Healthcare (+2.0% overweight) with their largest single overweight in Pharma/Biotech (+1.1%) while most underweight Staples (-2.0%). During the quarter, Healthcare significantly underperformed (-11%) while Staples fared much better (-0.9%).

It wasn’t pretty: here is the Q3 report card:

The S&P hit a record close of 2130.82 on May 21. It had gone 1,326 calendar days without suffering an official correction, or drop of 10% from a high. But that streak ended August 24 when the index finally cratered during a massive sell-off which included a nearly 1,100 point intraday plunge for the Dow Jones industrial average.
While the peak to trough for the S&P 500 was 12.4%, the pain inside the index was far greater at the individual stock level with 253 companies in the S&P 500 dropping over 20%. Biotech was the hardest hit with the biotech index dropping 20.1% in 8 days. Blame it on Hillary Clinton taking to Twitter and describing the “price gouging” as “outrageous” or blame it on one drug company making a decision to jack up the price of one pill from $13.50 to over $750. Whoever is to blame, it hurt.

The Dow fared a bit better than the S&P but still clocked a quarterly drop of 7.7% and 8.6% year-to-date. The Nasdaq has held up a bit better year-to-date at -2.4% but the quarter was similar to the Dow at -7.4%. The S&P 500 split the difference clocking a quarterly drop of 6.9% and year-to-date -6.7%. All this prompted the Wizards of Wall Street to revise their year-end targets for the S&P 500 downward by an average of 6%. With the overall average of the 10 largest brokerage firms predicting the S&P 50 will finish the year around 2100 or about 5% positive for the 4th quarter.

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