To taper (wind down the bond purchasing program which will cause interest rates to rise), or not. This was the question as regards the market in this 3rd quarter.
If you look at a market chart for this quarter, you will see we began July with a nice summer rally. This quickly led to a tumble in stock prices at the mere mention of the Fed scaling back on the quantitative easing program (QE).
It has been like this for the past few years. The market data looks consistently good for a few months, then it runs out of steam and the Fed comes to the rescue with another QE program. Well, we ran out of steam again and this time the Fed decided not to taper. And yes, the market did rally despite news of a sluggish economy and impending government shutdown, because we continue to artificially manufacture liquidity to keep the market going.
As far as performance, there was also a big difference in returns between the DOW and S&P 500 for the 3rd quarter. The DOW returned +2.2% versus +5.2% for the S&P 500.
Today we patiently await a resolution to the debt ceiling. While markets have been volatile, we do not expect the nonsense in Washington to have a long-term effect on them, or the companies we invest in. It may be, however, that we will see some dislocations in upcoming economic data that can cause short term volatility in the markets. The good news is that Janet Yellen has been nominated for the Fed chair position. Her expressed goal has been to keep the interest rate environment very low, until the economy can sustain itself without any extra support.
Most importantly, our portfolios are holding up well amidst the volatility. The companies we own continue to generate cash, pay dividends and keep their debt levels low. The following companies, for example, have all had significant dividend increases in the 3rd quarter:
Microsoft (MSFT $33.07, 3.4% yield) +21%
Caterpillar (CAT $83.52, 2.9% yield) +15%
Illinois Tool Works (ITW $74.23, 2.3% yield) +10%
Please feel free to call with any questions or comments.