Sources: Equity Market and Fixed Income returns are from JP Morgan as of 09/09/16. REIT, Rates and Economic Calendar Data from Bloomberg as of 09/12/16.
After 43 trading days without a change in value of greater than 1.0%, the S&P 500 Index dropped 2.5% on Friday, reminding investors that prices can move quickly and without much warning. After the close on Friday, the market1 had lost 2.4% for the week – the worst 5 day performance for U.S. stocks since February. Internationally, developed and emerging markets also experienced losses during Friday’s session but finished the week with mixed results as developed markets2 fell only 0.1% and emerging markets3 actually gained 1.1%.
Some of the suggested reasons for Friday’s sell-off include; 1) recent economic data releases, 2) a note from a widely followed bond manager, 3) speculation over central bank policies related to potential, future interest rate increases, and 4) already stretched valuations amidst record low volatility. Despite continued growth in most readings on the economy, some recent data releases have shown improvement that has missed estimates and thus disappointed. Jeffrey Gundlach, founder of Doubleline Capital, spoke to investors on Thursday, September 8, suggesting that inflation and interest rates are going to rise more than expected. This may have been part of the reason why yields rose and bond prices to fell on Friday. Also on Thursday, the European Central Bank (ECB) held a policy meeting announcing no change in their record low interest rates or quantitative easing program and mentioned that they would be reviewing the amount of purchases being made. These comments were seen as hawkish and weighed on international markets Friday. Continuing with the hawkish sentiment, Eric Rosengren, the President of the Federal Reserve Bank of Boston, said there was a reasonable case for gradually higher interest rates in a speech he delivered on Friday morning. The convergence of these views and announcements certainly had some bearing on the widespread sell-off that left few winners on Friday as nearly all asset classes, from stocks to bonds to commodities, dropped in value.
The weaker than expected economic data and hawkish comments come at a time when market valuations are near historical highs and volatility is suppressed. While we do not attempt to predict day to day changes in the market, we have been warning for some time now that volatility would return and that a balanced portfolio is necessary to help withstand sell-offs. Let us be clear, we do not believe that the U.S. economy is slowing, we do not believe that a rate hike is bad for the market over the intermediate term, and we do not believe that stocks are set for a prolonged correction. What we do believe is that while valuations are not a catalyst for a downturn, they can increase the potential severity of one. We also believe that investors should not attempt to time day to day changes in the market as this, historically, has been an exercise in futility. Many people find focusing on longer term performance easy to do when they have a comprehensive financial plan in place with a clear set of goals that need to be achieved.
1As measured by the S&P 500 Index. 2As measured by the MSCI EAFE Index. 3As measured by the MSCI Emerging Market Index.
Important Information and Disclaimers
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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.