Peek of the Week
Sept. 8, 2015
The
Markets
Who’s the culprit?
Speculating on who or what is to blame for recent
market weakness is a popular pastime right now. Last week, Barron’s said the search for someone to blame is a lot like a game
of Clue. So far, the most common conclusions are “the People's Bank of China
with a devalued currency in Beijing,” and “Janet Yellen with a potential
interest-rate hike in Washington.”
The article pointed out those theories might be
flawed. After all, China’s slowdown wasn’t a surprise. Analysts have been
factoring slower growth into their calculations for some time. U.S. rate hikes
are highly anticipated and, even though some fear they could tip the American
economy into recession (and argue recent stock price movement supports the
claim), relatively strong economic data casts doubt on the idea. Some analysts believe
the stock market can help predict where a country’s economy is headed. A
significant drop in stock prices could be indicative of a future recession and a
significant increase could suggest future economic growth.
So, why have markets headed south? Barron’s offered an alternative answer:
Investors with volatility trading strategies (and/or a case of nerves) across
the globe. The article pointed out the CBOE Volatility Index (VIX), a.k.a. the
fear gauge, popped from a low of 13 to a high of 53 between August 18 and
August 24:
August 24:
“That’s
higher than when Standard & Poor's cut the credit rating of the United
States in 2011, or at the peak of the European debt crisis in 2010, and seems
extreme given the evidence. But volatility isn’t simply a measure of fear. It
has been used to manage risk in portfolios that employ sophisticated trading
schemes… Although each type of fund adjusts to market changes at a different
speed, they all respond in the same way – by selling stocks… Don’t just blame
the professionals. For months now, there have been warnings about overcrowding
in the market’s best-performing stocks. And, when the market started to tumble
in August, these stocks were among the hardest hit…”
So, who caused the market downturn? Take your pick.
Data as of 9/4/15
|
1-Week
|
Y-T-D
|
1-Year
|
3-Year
|
5-Year
|
10-Year
|
Standard & Poor's 500 (Domestic Stocks)
|
-3.4%
|
-6.7%
|
-3.8%
|
11.0%
|
12.0%
|
4.5%
|
Dow Jones Global ex-U.S.
|
-4.1
|
-8.8
|
-17.0
|
2.3
|
1.0
|
1.0
|
10-year Treasury Note (Yield Only)
|
2.1
|
NA
|
2.5
|
1.6
|
2.6
|
4.1
|
Gold (per ounce)
|
-1.5
|
-6.8
|
-12.1
|
-13.0
|
-2.2
|
9.6
|
Bloomberg Commodity Index
|
-1.0
|
-15.2
|
-29.0
|
-15.5
|
-8.2
|
-6.4
|
DJ Equity All REIT Total Return
Index
|
-4.6
|
-9.0
|
-3.0
|
6.5
|
10.6
|
6.0
|
S&P 500, Dow Jones Global
ex-US, Gold, Bloomberg Commodity Index returns exclude reinvested dividends
(gold does not pay a dividend) and the three-, five-, and 10-year returns are
annualized; the DJ Equity All REIT Total Return Index does include reinvested
dividends and the three-, five-, and 10-year returns are annualized; and the
10-year Treasury Note is simply the yield at the close of the day on each of
the historical time periods.
Sources: Yahoo! Finance, Barron’s,
djindexes.com, London Bullion Market Association.
Past performance is no
guarantee of future results. Indices are unmanaged and cannot be invested into
directly. N/A means not applicable.
the travails of emerging markets. Just a few years ago, emerging markets were the toast of the town. In
general, emerging countries recovered much faster than developed countries
following the financial crisis and global recession. The MSCI Emerging Markets
Index delivered pretty remarkable (and highly volatile) performance during the
past decade. According to the MSCI fact sheet, annual returns have ranged from down 53.33 to up 78.51:
Annual Returns (%)
2005 34.00
2006 32.14
2007 39.42
2008 -53.33
2009 78.51
2010 18.88
2011 -18.42
2012 18.22
2013 -2.60
2014 -2.19
Through September 4, the Emerging
Markets Index was down 17.54 percent. While that’s a significantly smaller
swing than some we’ve experienced during the past 10 years, any double-digit
dip demands attention. The Wall Street
Journal explained the downturn like this:
“China’s
economic slowdown is having broad implications, hitting regional economies like
Taiwan, Malaysia, and Vietnam where manufacturing data showed declines for
August. Emerging markets are also nervous about the possibility of an interest-rate
increase in the United States, which would encourage global investors to invest
more there. China’s Shanghai Composite Index is down 39 percent after hitting a
seven-year high in June.”
Indeed, money is moving back
into the United States. Experts cited by The
Economist said about $44 billion has been pulled from emerging markets
since mid-July.
Christine Lagarde, Managing
Director of the International Monetary Fund (IMF), indicated the IMF’s outlook
for global growth was likely to be revised downward, in part, because emerging
economies are at risk of being negatively affected by commodity price weakness,
China’s slowdown, and America’s monetary policy.
How bad will it get in
emerging markets? The IMF’s July projection was that emerging market and
developing countries would grow by 4.2 percent in 2015 and 4.7 percent in 2016.
Developed economies, on the other hand, were expected to grow by 2.1 percent in
2015 and 2.4 percent in 2016.
Please keep in mind, international
investing involves special risks such as currency fluctuation and political
instability and may not be suitable for all investors. These risks are often heightened for
investments in emerging markets.
Weekly
Focus – Think About It
“I never blame myself when I'm not hitting. I just
blame the bat and if it keeps up, I change bats. After all, if I know it isn't
my fault that I'm not hitting, how can I get mad at myself?”
--Yogi Berra, Baseball player
Best regards,
Leif M. Hagen
Leif M. Hagen, CLU, ChFC
LP Financial Advisor
Securities
offered through LPL Financial Inc.,
Member
FINRA/SIPC.
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* This newsletter was
prepared by Peak Advisor Alliance. Peak Advisor Alliance is not affiliated with
the named broker/dealer.
* The Standard & Poor's
500 (S&P 500) is an unmanaged group of securities considered to be
representative of the stock
market in general. You cannot invest directly in this index.
* The Standard & Poor’s
500 (S&P 500) is an unmanaged index. Unmanaged index returns do not reflect
fees,
expenses, or sales charges.
Index performance is not indicative of the performance of any investment.
* The 10-year Treasury Note
represents debt owed by the United States Treasury to the public. Since the
U.S.
Government is seen as a
risk-free borrower, investors use the 10-year Treasury Note as a benchmark for
the long-term bond market.
* Gold represents the
afternoon gold price as reported by the London Bullion Market Association.
The gold price is set twice
daily by the London Gold Fixing Company at 10:30 and 15:00 and is expressed in
U.S. dollars per fine troy ounce.
* The Bloomberg Commodity
Index is designed to be a highly liquid and diversified benchmark for the
commodity futures market. The Index is composed of futures contracts on 19
physical commodities and was launched on July 14, 1998.
* The DJ Equity All REIT
Total Return Index measures the total return performance of the equity
subcategory of the Real Estate Investment Trust (REIT) industry as calculated
by Dow Jones.
* Yahoo! Finance is the
source for any reference to the performance of an index between two specific
periods.
* Opinions expressed are
subject to change without notice and are not intended as investment advice or
to predict future performance.
* Economic forecasts set
forth may not develop as predicted and there can be no guarantee that
strategies promoted will be successful.
* Past performance does not
guarantee future results. Investing involves risk, including loss of principal.
* You cannot invest directly
in an index.
* Consult your financial
professional before making any investment decision.
* Stock investing involves
risk including loss of principal.
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Sources:
http://www.barrons.com/articles/stocks-are-downand-its-your-fault-1441434205?mod=BOL_hp_we_columns (or go to http://peakclassic.peakadvisoralliance.com/app/webroot/custom/editor/09-07-15_Barrons-Stocks_are_Down_and_Its_Your_Fault-Footnote_1.pdf)
https://www.msci.com/resources/factsheets/index_fact_sheet/msci-emerging-markets-index-usd-net.pdf (or go to http://peakclassic.peakadvisoralliance.com/app/webroot/custom/editor/09-07-15_MSCI_Emerging_Markets_Index_USD-Footnote_4.pdf)
https://www.msci.com/end-of-day-data-regional (or go to http://peakclassic.peakadvisoralliance.com/app/webroot/custom/editor/09-07-15_MSCI_End_of_Day_Data_Regional-Footnote_5.pdf)
http://www.wsj.com/articles/no-emerging-markets-in-your-portfolio-look-again-1441388857 (or go to http://peakclassic.peakadvisoralliance.com/app/webroot/custom/editor/09-07-15_WSJ-No_Emerging_Markets_in_Your_Portfolio-Look_Again_Footnote_6.pdf)
http://www.economist.com/blogs/freeexchange/2015/09/emerging-economies (or go to http://peakclassic.peakadvisoralliance.com/app/webroot/custom/editor/09-07-15_TheEconomist-Turbulent_Markets_in_the_Suspect_Six-Footnote_7.pdf)
