After much hand-wringing and Fed watching by investors the FOMC (Federal Open Market Committee) announced at their September meeting they would, yet again, wait a little longer before raising interest rates. A slowdown in China’s economy, global market turmoil and little to no inflation domestically gave the Federal Reserve enough pause to keep interest rates at current bargain-basement levels. It seems we will have to wait a bit longer for the perpetually predicted rate increase.
Eventually the Fed will raise rates and those who have long been predicting it will finally feel vindicated. It’s kind of like predicting rain during a drought. Eventually the rain will come and the farmer who lost crop after crop planting in anticipation of prior expected rains will, pardon the pun, have his day in the sun. In the context of investors, many have been sitting on the sideline in cash for years earning little to nothing fearing the consequences from or waiting for the opportunities they expect will develop in a post-rate increase environment. The irony of the current obsession with and consternation by some investors about rising interest rates is that an increase in rates will likely be a response to an improved outlook for sustainable economic growth. That’s a good scenario and one which we welcome.
Economic and Market Update
During the third quarter, the stock market experienced its first 10% correction in over four years after China made a surprise announcement that it would devalue its currency in an attempt to forestall a slowdown in its economy. By devaluing the yuan, their goods become more affordable to their international trading partners, of which they have many. You would have thought China launched a military strike against Japan by the way the markets reacted. Near-sighted investors sold stocks by the bucketful in a fearful attempt at capital preservation. Of course the selloff generated little response from long-term investors who prefer to sit back and watch with detached amusement the hand-wringing, gnashing of teeth and futile attempt at market timing by those who just don’t understand the waxing and waning nature of economic/market cycles and the impossibility of consistently predicting these inflection points.
The 3rd quarter of 2015 turned out to be the worst quarter for stocks since the 3rd quarter of 2011 when the European debt situation was the crisis du jour. As stated earlier, markets world-wide experienced a China-shock correction in which all major equity indexes lost ground. Since China is the largest component in the emerging markets index it comes as no surprise that the basket of EM companies led the decline, down a whopping -17.90%. Developed international markets (MS EAFE) were not far behind losing -10.23% for the quarter. Back on this side of the pond things were better if you can call losing money “better”. Large stocks (S&P 500) gave up the least ground, down -6.44% and small companies turned in the worst performance, down -9.27%. Year-to-date, all major equity indexes are now under water, again with the EM leading the pack, down –15.47%. During the year’s first nine months, the S&P 500 was indicative of U.S. and developed international markets’ losses down -5.28%.
For bond investors, the 3rd quarter was a horse of a different color. As measured by our benchmark (Barclays Capital 1-5 Year Government/Corporate index) short-intermediate bonds gained +.60% for the quarter and +1.55% year-to-date. Long-term bond holders fared even better. I realize this is sounding like a broken record, but we own bonds in most accounts for this very contingency. When the stock market experiences a sell-off (which is the inherent nature of the public equities market) bonds temper a portfolio’s volatility allowing most investors to stay the course. The cost of that reduced volatility is lower long-term return expectations. However, most investors don’t live in the long-term, they live in the here-and-now. Without some method to reduce volatility to a sustainable level, many investors will abandon ship before they ever reach their investment destination.
What Next?
In an effort to reassure investors worried about a global melt-down, Janet Yellen and her FOMC colleagues were quick to point out they fully expect to raise rates before year-end and do not need to wait for a regularly scheduled meeting to do so. Of course, she then added the caveat that economic conditions can change causing the Fed to continue with their wait and see approach. My goodness, can you imagine allowing such wishy-washy comments to influence your investment strategy? Unfortunately, that is what many people do, consciously or not.
While oil prices demonstrate why no one should over-concentrate in a sector (i.e. energy), Volkswagen taught investors a valuable lesson why no one in their right mind should have a concentrated position in one or a few companies. Anything, literally anything, can go wrong and most investors will be unable to predict it or prevent it. Here is the world’s largest and one of the most respected automobile manufacturers admitting they lied and cheated to make their “clean diesel” engines comply with emissions standards. The company has lost 1/2 of its market value and most of its credibility. It will take a herculean effort to repair the damage. Again pardon the pun, but for investors with broadly diversified portfolios, the VW scandal was just a bug on their windshield.
Low interest rates, market volatility, corporate scandals and oil price implosions are all examples of the need for an intelligent, goals-based plan funded by a prudently managed, low cost, risk appropriate investment strategy. This is what the professionals at Wealthview Capital do every-day, all day. Thanks to those of you who partner with us in the planning, management and utilization of your financial resources.