3rd Quarter 2015 Market Commentary


A wave of downward volatility greeted global investors during the third quarter of 2015. Many markets were down more than 10% from recent highs. This is often called a market “correction” by the media. Emerging market stocks took the worst of the hit. The MSCI Emerging Markets Index lost -17.90% during the quarter that ended September 30. Year to date, the emerging markets index is down -15.48%. International developed stocks gave back gains posted in the first half of the year. The MSCI EAFE Index was down -10.23% for the quarter and is -5.28% for the year. US Stock fared better than international stocks and were down -6.44% during the quarter. Commodities lost -14.47% during the quarter and are down -15.80% year to date. Global real estate also suffered losses, and the S&P Global REIT Index is down -4.36% year to date. Investors rushed to bonds for safety, pushing interest rates lower yet again. The Barclays Aggregate Bond Index is up 1.13% for the year.

Here is a word of caution before I continue discussing recent negative performance. Long-term investors should avoid making changes to their portfolio based on short-term market movements. The volatility we’ve seen this summer is neither extraordinary nor outside the norm. The S&P 500 Index declines on average -14.2% in a calendar year. [1]  The most recent pullback of -12.7% (from the highest point to the recent low) is less than that 35-year average. The rest of this letter is an explanation of what happened during the quarter and not a prediction. In ThirtyNorth’s conference room in New Orleans, there is a real crystal ball. It serves as a constant, tongue-in-cheek, reminder that no one can predict the future.

1,000 Point Drop

On Monday, August 24th, the Dow Jones Industrial Average opened down over 1,000 points. The index bounced back and ended the day off 588 points. “Dow Drops 1,000 Points” is an exciting and fear-provoking headline. Remember that 1,000 points on a base of 16,500 is 6.1%. Five years ago, the Dow Jones was at a level of 10,000, and a drop of 1,000 points would have been a 10% decline. Why do we have such difficulty interpreting a 1,000-point drop? Many financial headlines made comparisons to “Black Monday”, the day in 1987 when the Dow Jones dropped and closed down 22.6%. Can you guess how many points the Dow dropped on that day?

508 points

To further illustrate this phenomenon, known as denominator bias, consider the following facts about the mortality rates of two (hypothetical) deadly diseases:

4 out of 100 who contracted the disease died

289 out of 10,000 who contracted the disease died

Which disease is worse? At first glance, doesn’t 289 deaths seem worse than 4? The first disease has a mortality rate of 4%, while the second has a mortality rate of 2.89%. Imagine if the headlines on August 24 read “Dow Drops 6%”. Do you think you might have been as concerned as that drop of 1,000 points?


Most of the volatility in emerging market stocks stemmed from concerns about slower economic growth in China. China is trying to manage a transition from a manufacturing and commodity-based economy to a consumer driven one. This is a difficult and often messy process. The Chinese government estimates GDP (gross domestic product) growth of 7% this year compared to 10% in 2010. Consider that a 10% growth in 2010 added about $844 billion US dollars to the Chinese economy. A 7.7% growth rate in 2013 added $986 billion US dollars. [2] Even though the rate of growth is slowing, China continues to add larger levels of demand to the global economy.

In early August, China’s central bank devalued its currency, the Renminbi, by 2% against the US dollar. This was the most significant change in value of the currency, also known as the Yuan, since 1994. The purpose of the devaluation was likely to aid Chinese exporters. [3] The move caused volatility in neighboring Asian currencies and global stocks. Investors grew concerned the move signaled that the Chinese economic data is worse than expected.

Despite significant short-term volatility, China’s transition to a consumer driven economy is happening. More than 750 million people drove to vacations during a recent national holiday week. This caused the enormous traffic jam in the photo below. That’s a lot of cars, gasoline, hotels, and dining out for a consumer economy.


China traffic jam 2

The Fed

There may come a day that I don’t have to mention the Federal Reserve in a quarterly letter. In a yearlong guessing game of “will they or won’t they” the Federal Open Markets Committee (FOMC) kept the Fed funds rate at 0.0% – 0.25% in September. It it’s statement the FOMC cited “recent global economic and financial developments” as a rational for leaving the policy rate unchanged. They also acknowledged, US “economic activity is expanding at a moderate pace.” Fed fund futures, a market-based expectation of the next rate hike, are now pricing the first rate hike in March 2016. The story here is that we continue to wait and see.


Crude oil declined last quarter when investors became concerned about a slowdown in China. China purchases 12% of the world’s oil. WTI (West Texas Intermediate) crude was near $60/barrel at the end of June. At $60/barrel, many US oil producers felt confident they could make money. In late August, WTI crude fell below $40/barrel, and remained in the low to mid $40s through September. Now the expectation is “lower for longer”. The US Energy Information Agency (EIA) estimates that WTI crude prices will average $50/barrel in 2015 and $54/barrel in 2016. [5]

I attended the Johnson Rice & Company Energy Conference earlier this month where I heard presentations from the management of 15-20 energy producers and service companies. The increases in cost efficiencies and the speed of drilling horizontal wells by these companies is astounding. Many cited that at year-end 2014, they were drilling wells in 14 days. Today, only nine months later, they are drilling wells in less than 10 days. Thank you to the Johnson Rice team for allowing me to attend the conference. It was a fascinating first-hand look at the current state of the US energy production boom. Despite recent weakness in crude oil and natural gas prices, the US energy production story is here to stay.

I generally end these market letters with a generic paragraph about “staying the course” or remaining “long-term, disciplined investors.” I’m confident you understand this concept now. This quarter, I encourage you to seek real life examples of denominator bias in the media. Perhaps you will read a headline that “Warren Buffet lost $1 Billion in last month’s market moves”. $1 Billion equates to 1.5% of Buffet’s $67 Billion net worth. I hope there will be examples from political candidates; assuming there are any who dare to mention numbers. Challenge yourself to evaluate numbers and statistics from the point of appropriate perspective.

Kai Ryssdal, host of NPR’s Marketplace, visited New Orleans last year. I attended the event, where he took questions from the audience. I asked him if he might consider categorizing the markets as “flat” when they move less than ¼ of one percent in a day. Instead of saying, “The Dow Jones Industrial Average was DOWN 40 points today,” perhaps he might say, “The Dow Jones was essentially flat, down 40 points in trading today.” Do you see how this language changes the story? A drop of 40 points from 17,000 is less than ¼ of one percent. Rather than leading listeners to focus on the market being DOWN, perhaps explaining that the move was not meaningful is a better way to communicate these facts. I have since heard Mr. Ryssdal use this language, but I take no credit for changing his behavior.


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Blair DuQuesnay, CFA, CFP®

October 2015




[1] JPMorgan Asset Management Guide to the Markets: 4Q 2014, September 20, 2015, slide 12.

[2] “On Market Corrections, and Keeping a Calm Head, “ Mark Mobius, August 27, 2015, http://mobius.blog.franklintempleton.com/2015/08/27/on-market-corrections-and-keeping-a-calm-head/

[3] “China Moves to Devalue Yuan,” Wei, Lingling, Wall Street Journal, August 11, 2015.

[4] Board of Governors of the Federal Reserve System: Press Release, September 17, 2015, http://www.federalreserve.gov/newsevents/press/monetary/20150917a.htm

[5] US EIA “Short-term Energy and Winter Fuels Outlook,” October 6, 2015, http://www.eia.gov/forecasts/steo/






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