Stocks Recede Globally but Volatility Remains Relatively Low
Stocks fell in value around the world last week with the U.S. based S&P 500 Index losing 0.65%, the international based MSCI EAFE Index falling 1.71% and the MSCI EM Index, which serves as a proxy for emerging markets, declining by 2.08%. Despite the recent drop in both stock and bond prices, the volatility index, or VIX, at the time of this writing, remains about 23% below its 10 Year average of 20.19.
Following this theme, Goldman Sachs chief U.S. equity strategist, David Kostin, noted this morning in an interview with CNBC that he expects little to change in terms of volatility and U.S. stock returns for the balance of this year. For these reasons we believe it is important for growth oriented investors to consider incorporating international allocations, in both developed and emerging markets, into their existing portfolio of U.S. stocks. This, of course, must be done with a full understanding of the potential impacts of currency volatility and the downside risks tied to the future of Greece within the Eurozone.
The question many investors face then becomes how much to allocate to international stocks relative to their other investments. Unfortunately there is no set amount that is exactly correct for every investor and this is largely dependent on their time frame, objectives, risk tolerance and other investments. In our experience, however, we have found that individual investors with allocations to international markets typically have achieved this exposure through the use of mutual and exchange traded funds (ETFs). While we believe these two products may be appropriate vehicles for many people, most funds are created using a different index, weighting scheme and fee structure providing very different risk and return potentials.
Sources: Equity Market, Fixed Income and REIT returns from JP Morgan as of 6/8/15. Rates and Economic Calendar Data from Bloomberg as of 6/5/15.
Important Information and Disclaimers
Disclosures: Past performance does not guarantee future results. We have taken this information from sources that we believe to be reliable and accurate. Hennion and Walsh cannot guarantee the accuracy of said information and cannot be held liable.
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