2014 Q3 Market Update

State of the Markets

What a difference a month makes. For most of the third quarter, stock markets around the world continued their slow but steady upward advances, with several stock market indices reaching all-time highs over the summer. Then came September, a month in which some asset classes gave back significant portions of their year-to-date gains. The end result is a bad month, a poor quarter, and a mediocre (but still positive) year. This change in direction for equity markets is partly due to concerns about faltering economic growth in Europe and China, partly due to the looming end of the Federal Reserve’s dovish policies, partly due to geopolitical concerns (Ukraine, ISIS), and partly due to fears about the spread of Ebola and the affect it could have on economic growth.

The total returns for major asset classes are below.

Pic from quarterly report

Unfortunately (as of this writing), the pressure on equity markets continues. Day to day volatility has increased dramatically and equity markets have fallen significantly off their highs. Thankfully, the bond market has held up its end of the bargain and has been rising in the face of declining stock prices.

The Importance of Perspective

It is not surprising that the market has pulled back from all-time highs. The U.S. stock market has had a tremendous run and (as pointed out in our last quarterly letter) was overdue for a pullback. Given recent developments, we now have a catalyst. Corrections are the rule; not the exception. Some will be short and shallow and some will not. However, we know there is significant reward for staying invested through these ebbs and flows. The chart below illustrates U.S., international, and emerging stock markets over the last 25+ years. (These indices were picked to illustrate global equity exposure, and not the performance of our actual recommendations or client portfolios. The timeframe chosen is the longest common period for all three indices.)

2014.10.15 Stock Market History

There are lots of ups and downs and “throw in the towel” moments, but a buy and hold investor would have made between 6.7 to 20 times their initial investment over the 25 years which included the Great Recession the Lost Decade.

Regardless of charts, market history, or actual investment performance, no market decline is easy to stomach. In the face of market corrections, investors (myself included) are often hounded by regret and concern. This is in stark contrast to Warren Buffett, whose comments on CNBC last week reminded us to focus on what matters. When asked where stock prices are headed:

 “I like buying (a stock) as it goes down, and the more it goes down the more I like to buy. We’re not looking at any macro factors. We’ve never had one decision that involved a macro factor. It just doesn’t come up.”

His questioner, a CNBC talking head whose job it is to turn noise into headlines, responded:

“You put a dagger in my heart, Warren.”

Now, we are not Berkshire Hathaway sitting on billions in cash to invest, but every one of our clients has a plan and a diversified investment portfolio designed to implement that plan. Do those portfolios anticipate market volatility? Of course they do.  Are those plans designed to withstand a market correction? Absolutely, and in that we can side with Warren.

Conclusion

There is currently a lot of uncertainty in the world and stock markets don’t like uncertainty. But as we watch the daily battle between fear and greed play out in equity prices, I take some solace in the fact that five years ago the “uncertainty” was about the survival of our financial system. Today, it is something much less ominous.

Posted by Jay Healy at 3:37 PM
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