Stocks continued their rebound last week and the S&P 500 Index is now 8.2% higher compared to its Q3 ending value on September 30. Since the U.S. equity markets hit a 2015 bottom on August 25, they have now gained over 11% and are on track to finish the year in positive territory. This recent strength comes in the face of a strong U.S. dollar weighing on corporate profits (33% of S&P 500 company’s aggregate revenue is generated from overseas1), negative earnings growth (quarterly earnings for the S&P 500 Index are expected to decline 2.1%2), and global growth concerns (the IMF revised down their 2016 global GDP growth estimate from 3.8% in July to 3.6% in their October report3).
In order to explain and understand the performance of a portfolio of stocks, it is important to consider not only the performance of the market in aggregate but also the sectors and individual components that underlie it. This year, as is typically the case each year, there has been divergence in the performance of the ten sectors that comprise the S&P 500. What appears atypical this time around is the divergence in the direction of their YTD returns.
You can see that exactly 50% of the sectors are in positive territory and 50% have generated negative returns through the end of last week. Since 2006, there has only been three occurrences when all ten of these sectors did not all move in the same direction. In 2007, the Consumer Cyclical and Financial Services sectors (both cyclical in nature) experienced negative returns despite the other eight sectors posting gains. In 2011, Materials, Financial Services and Industrials (all three being either cyclical or sensitive sectors) also lost value while the remaining sectors finished higher4. Finally, last year saw all sectors finish higher with the exception of Energy which infamously declined in concert with lower oil prices. This year, the divergence is wide spread across cyclical, sensitive and defensive sectors and appears, at this time, to be characteristic of a stable but low growth U.S. economy that is dealing with a collapse in the price of energy related commodities and uncertainty in terms of future growth potential and interest rate activity.
Basing investment decisions on recent historical data alone may not yield a diversified portfolio that can withstand the likely continuation of volatility and divergence in sector returns that we have seen this year. We recommend that anyone looking to invest for growth in this challenging market environment seek the advice of a professional portfolio manager.
Important Information and Disclaimers
Disclosures: Hennion & Walsh is the sponsor of SmartTrust® Unit Investment Trusts (UITs). For more information on SmartTrust® UITs, please visit www.smarttrustuit.com. The overview above is for informational purposes and is not an offer to sell or a solicitation of an offer to buy any SmartTrust® UITs. Investors should consider the Trust’s investment objective, risks, charges and expenses carefully before investing. The prospectus contains this and other information relevant to an investment in the Trust and investors should read the prospectus carefully before they invest.
Investing in foreign securities presents certain risks not associated with domestic investments, such as currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share price volatility. These risks are heightened in emerging markets.
There are special risks associated with an investment in real estate, including credit risk, interest rate fluctuations and the impact of varied economic conditions. Distributions from REIT investments are taxed at the owner’s tax bracket.
The prices of small company and mid cap stocks are generally more volatile than large company stocks. They often involve higher risks because smaller companies may lack the management expertise, financial resources, product diversification and competitive strengths to endure adverse economic conditions.
Investing in commodities is not suitable for all investors. Exposure to the commodities markets may subject an investment to greater share price volatility than an investment in traditional equity or debt securities. Investments in commodities may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity.
Products that invest in commodities may employ more complex strategies which may expose investors to additional risks.
Investing in fixed income securities involves certain risks such as market risk if sold prior to maturity and credit risk especially if investing in high yield bonds, which have lower ratings and are subject to greater volatility. All fixed income investments may be worth less than original cost upon redemption or maturity. Bond Prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline of the value of your investment.
MSCI- EAFE: The Morgan Stanley Capital International Europe, Australasia and Far East Index, a free float-adjusted market capitalization index that is designed to measure developed-market equity performance, excluding the United States and Canada.
MSCI-Emerging Markets: The Morgan Stanley Capital International Emerging Market Index, is a free float-adjusted market capitalization index that is designed to measure the performance of global emerging markets of about 25 emerging economies.
Russell 3000: The Russell 3000 measures the performance of the 3000 largest US companies based on total market capitalization and represents about 98% of the investible US Equity market.
ML BOFA US Corp Mstr [Merill Lynch US Corporate Master]: The Merrill Lynch Corporate Master Market Index is a statistical composite tracking the performance of the entire US corporate bond market over time.
ML Muni Master [Merill Lynch US Corporate Master]: The Merrill Lynch Municipal Bond Master Index is a broad measure of the municipal fixed income market.
Investors cannot directly purchase any index.
LIBOR, London Interbank Offered Rate, is the rate of interest at which banks offer to lend money to one another in the wholesale money markets in London.
The Dow Jones Industrial Average is an unweighted index of 30 “blue-chip” industrial U.S. stocks.
The S&P Midcap 400 Index is a capitalization-weighted index measuring the performance of the mid-range sector of the U.S. stock market, and represents approximately 7% of the total market value of U.S. equities. Companies in the Index fall between S&P 500 Index and the S&P SmallCap 600 Index in size: between $1-4 billion.
DJ Equity REIT Index represents all publicly traded real estate investment trusts in the Dow Jones U.S. stock universe classified as Equity REITs according to the S&P Dow Jones Indices REIT Industry Classification Hierarchy. These companies are REITSs that primarily own and operate income-producing real estate.