New York (HedgeCo.net) After suffering through the worst quarterly loss in four years for the overall market, investors seem to be a little more uncertain about the fourth quarter and what it will bring to the market. We asked the managers that run the fund manager models on the HedgeCoVest platform to provide some insights into what they see developing in the quarter.
Here are some of the comments and outlooks:

Ashbury Behavioral Long Short Model
Looking ahead to the fourth quarter, we see the deteriorating economic signals abroad continuing to impact the US with stock valuations still high compared to the amount of value and cash flow that companies actually generate. So we think the volatility will continue as investors continue to confuse leading indicators (orders, inventories, etc.) and lagging indicators (new jobs, unemployment, etc.), until it all ends in a significant bear market. Unfortunately, there’s little that the Fed can do in this scenario with interest rates already so low if investors don’t want to hold risky assets.
Eric McGill, Ashbury Heights Capital

JAB Fundamental Value Model
Every year it seems the markets experience a correction in the August-October timeframe. This year the volatility was further spiked up by the collapse in emerging markets, especially China. That led to rather indiscriminate selling of anything cyclical. My research suggests that many capital equipment stocks, some with no exposure to China whatsoever, are trading at valuations that would only be justified by a deep recession. The US economy however appears likely to continue to grow modestly in spite of the international headwinds. The construction equipment segment of the S&P 500 was down 28% for the year through the end of the third quarter, even though commercial construction spending grew by over 10% in the first half of this year. Energy production companies were down 26% in the same period. As contrarian value investors we believe that the price declines in these sectors have been unjustified by the economic situation, and we began finding great values in the second quarter. They continued to fall in the third quarter as most portfolio managers did not appear to want to step in ahead of quarterly reporting. Since the beginning of the fourth quarter however, these have been some of the best performing areas of the market, and I believe this is a great time to be weighted in these areas for the rebound.
John Barnett, JAB Capital Management

Pawleys Dividend and Pawleys Growth Models
Pawleys Capital remains bullish for the remainder of 2015 despite the recent, albeit long over-due, correction. The economic data we follow continue to show ho-hum growth, and the late cycle indicators of jobs and housing continue to lurch along and show positive signs. We do not anticipate that the Fed will raise rates until their inflation target is reached, but the ongoing noise and debate around the timing of their first hike may create volatility. This makes active management of equities even more critical for investors. We will be keeping a close eye on industrials and, to some extent, consumer stocks, because there are risks to avoid and simultaneous opportunities being created by the strong dollar and relative slowdown in China.
Kathryn Schwartz, Pawleys Capital Management

Pinnacle 130/30 Model
While it has been largely argued that the Fed’s low interest rate policy was propping up markets, the Fed’s announcement that it wasn’t raising rates was followed by an acceleration of the declines in the U.S. equity markets. We have long felt that by keeping rates at artificially low levels, the Fed was distorting market forces to the point that overall economic activity was slower than it would otherwise be.

The Fed isn’t the only monetary authority working to keep an economy moving forward. It appears that economic growth in China is undergoing a meaningful slowdown. We still expect growth north of six percent which theoretically shouldn’t be a negative. However, while the country maintains large currency reserves, internally there has been an excessive amount of debt utilized – especially in the real estate sector.

Unlike the situation in 2009 with our real estate bubble, we believe the Chinese government has sufficient financial strength to alleviate the difficulties. But having the strength is not proof that it will be successfully utilized. As a result, after a substantial run up, Chinese equity markets have fallen significantly. This, combined with fears associated with falling commodity prices, had spread to our markets before the issues discussed above came into play.
There are two reasons why commodity prices fall – too much supply or too little demand. But only in the latter case should the situation be viewed as a broad negative. Too much supply caused by productivity gains – which appears to be the current issue – is only a problem for the industry in question. So, falling energy prices are a problem for the oil industry. For the rest of us they are the equivalent of a generous tax cut. We think one of the greatest surprises that may occur in upcoming quarters is the benefit to consumers’ wallets and corporate profits from the impact of lower energy costs.
Despite all the noise and some real problems, economic growth marches onward. That’s good for everyone!
Stephen Fauer, Pinnacle Capital Management

Van Hulzen Covered Call Model
We welcome back the volatility that showed up in the third quarter and we think it continues in the fourth quarter. Our strategy involves covered calls and covered call strategies have historically out-paced the market during volatile periods. After three years of record low volatility, covered call strategies look poised for out-performance. During periods of heightened volatility, option premiums have a tendency to increase in price, as investors are willing to pay more for a hedge in their portfolios. Because covered call strategies are designed to sell options for income purposes, these higher premiums can result in a higher yield to the investor. These strategies tend to do a particularly good job of protecting portfolios when the market declines. Call premiums can provide an income buffer that helps mitigate downside exposure, and this buffer potentially expands as volatility rises.
Stefan ten Brink, Van Hulzen Asset Management

These are the thoughts and insights of professional investment managers with many years of experience. While there isn’t a consensus on which way the market will head during the quarter or whether or not the Fed will do anything with rates, most see the U.S. economy continuing the moderate growth rate we have seen over the last couple of years. Several see the heightened volatility that we saw in the third quarter being a factor in the fourth quarter as well.

Rick Pendergraft
Research Analyst
HedgeCoVest