The third quarter began with much talk about the ending of the Quantitative Easing (QE) program, implemented by the Fed to help maintain a 2% level of inflation. Unemployment numbers were improving, manufacturing was showing signs of strength and consumer confidence was high.
Then the markets began to worry about inflation becoming an issue. The one time idea that we would have faster growth, higher inflation and higher rates was quickly turned on its head at the first weak employment report. Simultaneously we began receiving reports that housing was struggling, the dollar was strengthening and Europe was falling into a recession. All this volatile news in the quarter reversed the move up we had seen in interest rates. For example, the 10-year treasury yield that was at 2.61% one month ago, is now backing down to 2.20%.
As of today, the equity markets are down about 5%. If you have been reading our newsletter consistently, you know that we have always talked about how the QE programs have propped up the market returns over the years. Last year the market was up over 30%, at a time when the economy grew just 2.2%. Which is not bad, but not enough to warrant such outsized returns.
A correction in the equity markets is an opportunity for investors. We expect economic growth to be between 1.5 and 2.0% for a while. But it is our opinion that we will need to see fiscal reform both here, and in Europe, to move the markets substantially higher. In the meantime, the large multinational companies have survived sluggish economic growth in the past and will continue to do so. At CAIM we will continue to focus on those companies with stellar balance sheets and the ability to grow their cash flow. Many of those companies that have not done well last quarter, have attractive dividend yields and continue to increase their dividends.