2015 3rd  Quarter Commentary

 TWO DOWN AND TWO TO GO

 

Over the last few years circumstances have arisen which have allowed us to anticipate certain events with a much higher probability than normal. Following are four of these events, two of which have occurred and two we are still expecting.

 

TWO DOWN

  1. As you are aware from our past Commentaries we have been expecting a temporary correction of 10% or more for some time. Obviously that occurred this year as the Dow Jones Industrial Average dropped from a high of 18,312 to a low of 15,666 (a -14% drop).

 

  1. Since 2008 the Federal Reserve Bank has been buying U.S. Treasury Securities in order to prop up the price of U.S. Bonds. (This was referred to as “Quantitative Easing”.) Everyone knew the purchases, which ended up amounting to $80 Billion per month, could not be sustained indefinitely.  After Chairperson Yellen took over as Chair of the Fed in 2014, she systematically reduced the purchases by $10 Billion per month until the program ended.

TWO TO GO

  1. Since 2008 the Federal Reserve Bank has held interest rates at virtually 0%. This was done in order to reduce the cost of borrowing and stimulate consumer purchasing activity during the economic recession.  Usually interest rates are raised again when the economy begins to recover.  Historically the recovery begins 18 to 24 months from when the recession started.  The problem is that the economy hasn’t sustained a true economic recovery since 2008.  (7 years)  However, everyone is aware that the Fed will have to raise interest rates back to around 4% – 5% in order to be able to cut rates in the future if cuts are needed.

 

  1. Since June of 2014 the price of oil has dropped from $115/barrel to $43/barrel. This has had a drastic effect on certain sectors of the stock and bond markets.  Currently U.S. oil producers are prohibited from selling oil overseas, and the proposed agreement with Iran would lift existing sanctions allowing them to begin selling their oil on the global market.  Also, the Middle East is currently very unstable which historically has led to rising oil prices.  These variables have made it difficult for the global oil market to find stability.  However, we expect that eventually oil will stabilize at a reasonable price.   Recently, we have heard two presentations from energy companies which have suggested the oil prices might settle around $60 to $70 per barrel, but this remains to be seen.

 

As the last two events occur, it could help create more economic and market stability.

 

 

Sources: Wall Street Journal, Infomine.com, U.S. Energy Development Corp.

These are the opinions of Financial Professionals, Inc. and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice.