Entering the fourth quarter little has changed regarding the outlook for economic growth in the U.S. Forecasts are still clustered around 3% real GDP expansion, and the data have been consistently supportive of this type of growth. Corporate profits are projected to increase roughly 6% in this environment, which also remains reasonable.

What changed dramatically towards the end of September was overall market volatility and investor sentiment. We wrote about volatility on our blog September 16 and then again on October 7. Our observation was that markets had been abnormally calm for a long time and that a return to historical levels of day-to-day volatility did not necessarily portend a negative outlook for stocks. Since then, volatility has continued to increase as worries mount. We don’t survey investors but we are definitely plugged-in to financial news via CNBC,Twitter, and other outlets, and collective attitudes (i.e. investor sentiment) have become more pessimistic. It is difficult to discern whether moods have soured due to the images coming from Iraq or because of fears of a global Ebola pandemic. Both are troubling, but realistically neither with have a material impact on the fundamentals of the companies we own.

Investors are also vigorously handicapping the timing of the Fed’s inevitable exit from financial markets, which is more likely responsible for the recent increase in volatility than ISIS or Ebola. The consensus is that the Fed will first raise rates during Q2 of next year. If the economy continues to expand and if employment growth accelerates, this is as good as guess as any. If, on the other hand, Euroland slips back into recession and slowing growth globally hinders our domestic expansion, the Fed will likely hold its currently accommodative stance much longer.

In the short run, bond yields have actually moved lower, not higher despite the overwhelming consensus view that rates must normalize at higher levels at some point. The U.S. is now potentially the best growth story amongst developed economies globally, so capital is flowing into the U.S. from around the globe. This strengthens the U.S. dollar versus other currencies and pushes bond yields down as these newly purchased dollars are invested in Treasuries. If these dollars stay and are eventually deployed in the economy, this is good news for America. However, in the immediate-term, the dollar’’s strength is creating volatility within financial markets and driving down prices of dollar-denominated commodities – most notably oil. Since peaking near $104 per barrel in June, prices for west Texas intermediate crude have fallen 20 percent. This is additional good news for domestic growth. Beneficiaries of lower oil prices include American consumers and companies that use energy commodities as production inputs. With modest growth trends already in place, lower oil prices (and gasoline) will provide another tailwind for the expanding U.S. economy and for corporate profits.

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