Preparing for Volatility
Sources: Equity Market and Fixed Income returns are from JP Morgan as of 10/07/16. REIT, Rates and Economic Calendar Data from Bloomberg as of 10/10/16.
The S&P 500 Index dropped 0.6% last week, while on the international front developed markets1 fell 0.8% and emerging markets2 gained 1.3%. Economic data continues to suggest that the economy is expanding at a moderate pace, firming the argument for an interest rate hike before year-end and pushing the yield on the 10 Year U.S. Treasury up to 1.73% from 1.60% last week. Specifically, the employment report released Friday showed that while the unemployment rate ticked up to 5.0%, 156,000 people found jobs and the participation rate increased to 62.9%. As a reminder, the participation rate measures the number of people who are employed, or are actively looking for work, with a higher number generally being viewed as a more positive sign of the labor market.
The third quarter, now in the history books, had a long bout of suppressed volatility but started with rapid gains in stock prices and finished with back and forth trading during the month of September that saw five separate days where the U.S. market3 moved in excess of 1.0%. This includes a 2.5% drop on Friday, September 9, which was likely induced by concerns the Federal Reserve would hike interest rates after the September 20 – 21 meeting. The interest rate hike did not come to pass, of course, but investors would be wise to remember how quickly and severely markets can react and, at times, overreact.
The fourth quarter is already off to an eventful start with OPEC appearing to reach a handshake agreement for a reduction in oil production, earnings season about to commence, U.S. elections heating up, and an interest rate hike by the Federal Reserve likely before year-end. Each of these events, and certainly countless others, has the potential to cause substantial swings in stock prices. Given that valuations in the stock market are already lofty by some measures, and that interest rates are low, having alternative investments could potentially serve as a shock absorber against a downturn in the prices of stocks and/or bonds. Alternative investments are wide-ranging and can include areas such as commodities, real estate or even foreign currency-oriented strategies. As with any decision relating to how to construct a portfolio strategy, we strongly encourage investors to work with a professional when deciding how much to allocate to different asset classes including alternative investment types as appropriate.
In addition to introducing alternative investments as a source of potential downside protection, a balanced allocation to sectors can help to ensure that the equity portion of your portfolio does not underperform the broader market and fall short of meeting your investment objectives. To have a portfolio report completed and/or to learn more about protecting your investments from the potential volatility ahead, please do not hesitate to speak with your Hennion & Walsh Financial Advisor or a member of the Hennion & Walsh Asset Management Team.
1International developed markets are represented by the MSCI ACW Index. 2Emerging markets represented by the MSCI EM Index. 3U.S. stocks measured by the S&P 500 Index.
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 & Walsh cannot guarantee the accuracy of said information and cannot be held liable. This information is provided for informational purposes only and is not a solicitation to buy or sell any of the asset classes or sectors discussed.
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.