CGM Mutual Fund decreased -7.1% during the third quarter of 2015 compared to a return of -6.4% for the Standard and Poor’s 500 Index (S&P 500 Index) and 1.2% for the BofA Merrill Lynch U.S. Corporate, Government and Mortgage Index.
The U.S. economy continues to show evidence of moderate expansion after a slow start to the year. The Commerce Department reported on July 30 a seasonally adjusted annual growth rate of 2.3% for the second quarter of 2015, which was later revised up to 3.9%. Several indicators reported in July pointed to further momentum in the U.S. economy. According to the Commerce Department, orders for durable goods increased 3.4% in June, indicating that U.S. businesses are beginning to increase spending, and housing starts increased by 9.8% in June, driven largely by demand for multi-family construction. The Labor Department reported the June unemployment rate at 5.3%, although wage growth has been reserved, increasing 0.2% in the second quarter of 2015 compared to the same quarter last year. Despite the positive indicators, some restraint in the U.S. markets began to appear in July as investors reacted to economic worries from abroad. Decreasing Chinese economic growth impacted the U.S. stock market performance as investors reacted to large sell-offs in the Shanghai Composite Index and falling commodity prices as demand from China for raw materials weakened. While the Chinese economy is the second largest in the world and a slowdown could spread to other areas of the globe, particularly those that supply raw materials for Chinese manufacturing, U.S. exports to China account for only about 1% of U.S. GDP, so the impact of Chinese recessionary pressures should be minimal for the U.S. economy.
China’s devaluation of the yuan in early August and further concerns about the Chinese economy continued to negatively affect the U.S. stock market through August though several factors suggest that the U.S. economy remains on track for moderate growth into 2016. After a decline in July, the Conference Board reported that its index of consumer confidence rebounded to 101.5 in August and 103.0 in September. Manufacturing continued to expand as the Federal Reserve reported that industrial production increased 0.6% in July, its largest advance since November 2014. Autodata Corp. reported that U.S. auto sales increased by 5.3% in July and are currently on pace to exceed 17 million vehicles for the year for the first time since 2001. The housing sector continued to improve as the Commerce Department reported that starts on single family units, which represent about two-thirds of the total housing market, grew 12.8% in July to their highest level since December 2007. Growth in single family units was also revised up for June from 9.8% to 12.3%. In addition, the National Association of Home Builders reported that its index of builder confidence in the market for new single family homes increased to its highest level since November 2005. Employment statistics also continued their positive trend. The Institute For Supply Management reported that its index of employment activity in non-manufacturing industries (which represents approximately 90% of all private employment) grew in August for the sixty-seventh consecutive month. In addition, the Labor Department’s four-week average of unemployment claims hit a 15 year low of 266.00 on August 8, and subsequent reports have continued to indicate steady job creation.
In early September the Labor Department reported that increased hiring, largely in the services industry, pushed the unemployment rate down to 5.1%, its lowest level since 2008 and within the range the Federal Reserve considers full employment. Despite Federal Reserve Chair Janet Yellen’s recent statement that the low unemployment rate indicates less economic slack which will ultimately create inflationary pressures, the Federal Reserve opted to leave interest rates unchanged at its September meeting. In its statement, the Fed referenced recent market turmoil, the impact of a strong dollar on exports and import prices, a weakened global economy and specifically, slow growth in China. The Federal Reserve anticipates that it will raise interest rates later this year, citing increased business investment and increased household spending as encouraging developments in economic growth. Evidence of rising household spending and consumer activity was provided by the Commerce Department which reported that retail sales increased 0.2% in August. The Commerce Department also adjusted its June report to show that sales figures were unchanged for the month and revised its July report up from 0.6% to a 0.7% increase. August was the sixth consecutive month without a drop in retail sales, providing further evidence that, despite recent stock market performance, U.S. consumer sentiment is growing more positive and consumer spending is a primary factor in U.S. economic growth.
The yield on ten-year U.S. Treasury securities was 2.35% at the beginning of the quarter and dropped to 2.06% at the end of the quarter based on diminished inflation expectations and concerns about global growth. We believe that continued positive U.S. employment figures and moderate U.S. economic growth may begin to push the yield higher. U.S. stock prices remain above their historical average with the S&P 500 Index trading at 19.3 times trailing earnings. However, given the low level of interest rates and inflation, we feel this valuation appears to be appropriate.
On September 30, 2015, CGM Mutual Fund was 24.2% invested in housing and building materials, 15.1% invested in money center banks and 6.6% invested in basic materials. In addition, 26.5% of the portfolio was invested in short-term U.S. Treasury Notes. The Fund’s three largest equity holdings were D.R. Horton, Inc. (DHI, Financial), the Lennar Corporation (LEN, Financial) and Toll Brothers, Inc. (TOLL, Financial) (all housing and building materials).
David C. Fietze
President
October 2, 2015
The performance data contained in the report represent past performance, which is no guarantee of future results. The table above does not reflect the deduction of taxes a shareholder would pay on Fund distributions or the redemption of Fund shares and assumes the reinvestment of all Fund distributions.
The investment return and the principal value of an investment in the Fund will fluctuate so that investors' shares, when redeemed, may be worth more or less than their original cost. Current performance may be higher or lower than the performance data quoted.
