Further Volatility Likely Over the Near Term
Sources: Equity Market, Fixed Income and REIT returns from JP Morgan as of 9/04/15. Rates and Economic Calendar Data from Bloomberg as of 9/07/15.
Stock Markets around the world continued their sell-offs last week ahead of Labor Day in the U.S. The S&P 500 Index and the Dow Jones Industrial Average both fell over 3% over the five days, while developed markets internationally (as measured by the MSCI EAFE Index) dropped over 4% as continued volatility appears to be feeding on itself and perpetuating the large daily swings witnessed over the past few weeks. This theme; “volatility causing more volatility”, is one that may explain the gyrations in stock prices considering that economic data since this down trend began has largely been supportive of a stable U.S. and, in some cases, global economy.
As we discussed in last week’s update, there are a large number of price incentive-based institutional traders that are not trading based on the future expected returns but rather on future expected risk. Given the uncertainties surrounding the Federal Reserve’s rate decision on September 17 and the mixed results of China’s attempts to stabilize their domestic markets, we believe that there is a strong case to be made that continued volatility is likely to persist over the near term.
The question retail investors now face is: “How do I navigate these turbulent markets?” Having the flexibility to make tactical adjustments and reduce risk in a deliberate and measured way offers longer term investors a solution to bouts of increased short term risk. Prior to making any change, however, it is necessary to quantify how much risk your portfolio has taken historically relative to the amount of risk witnessed over a shorter time period such as one month. The effect of the changes being considered must also be consistent with the longer term objectives. We, at Hennion and Walsh, continue to stress that moving a portfolio from fully invested to cash or from cash to being fully invested (i.e. traditional market timing behavior) is an inefficient and costly way of managing a portfolio. To learn about the tactical changes we are making in our client accounts to help limit the volatility we expect to take place over the near term, while positioning to take advantage of a continuation of this secular bull market over the longer term, please do not hesitate to contact your Hennion and Walsh Financial Advisor or a member of the Hennion and Walsh Asset Management Team.
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.