DWM’s “Spooky” 3Q15 Market Commentary

Nightmare on Wall StWith Halloween coming later this month, some people may perceive October as scary. But after the blood-bath that took place in the markets during the third quarter, August and September may well be claiming themselves as more frightening than Frankenstein and Dracula (or Freddy and Jason, for you 80s/90s movie buffs). In fact, it was the worst quarter that stocks have experienced since 3Q11. What is creating all of this horror one may ask? Well, the black cats are the uncertainty of what the Fed will do with interest rates and China’s economic slowdown (see our recent blog for more info). Fortunately, it’s not so gruesome for most of our clients, as they have well-balanced portfolios which also include fixed income and alternatives. These two asset classes can really help cushion the equity carnage in times like these.

Here’s how the major asset classes fared:

Equities: The MSCI AC World Equity Index suffered a 9.5% stabbing in the third quarter and has dropped 7.0% Year-To-Date (“YTD”). International funds had an even bloodier quarter, with the MSCI AC World Index Ex USA down 12.2% and now off 8.6% for the year.

Fixed Income: The Barclays US Aggregate Bond Index was up 1.2% and 1.1%, 3Q15 and YTD, respectively; and the Barclays Global Aggregate Bond Index +0.9% and -2.3%, respectively. Longer term bonds did the best, but not many people have much of that exposure going into the lurking rising interest rate environment. The lower the duration and lower the quality, the more ghastly it was for the quarter. High yields which correlate more to the equity market fared the worst, down 4.9%, as represented by the Barclays US Corporate High Yield Index.

Alternatives: We prefer alternatives that aren’t that correlated to the equity market for wicked times like these. Some alternatives did just that. For example, the BlackRock Long/Short fund was a positive at 0.7%, the Pioneer Insurance-linked Securities fund was up 4%, and the AQR Managed Futures fund was up over 6%. Unfortunately, not all of the holdings went a positive direction. MLPs have been under attack all year, as have many energy-related securities, but we think it is gravely overdone and there may be opportunity here. Gold is typically a great diversifier and behaves differently than equities, but it sold off in 3Q15. In any event, alternatives definitely fared better than equities, but unfortunately produced overall negative results in 3Q15, with the Credit Suisse Liquid Alternative Index down -2.5%.

So, is this Nightmare on Wall Street almost over? It should be noted that at the time of this writing, just a few days into the quarter, the markets have rallied. In fact, the S&P500 has risen 5.6% over the past five sessions, its’ best 5 day gain since December 2011. Ironically, in the ‘bad news is good news’ department, it was a weak jobs report last week that fueled the rally. See, the market is convoluted in that many times it reacts positively to bad news and vice versa. The weak jobs report was actually perceived as good because that means that weakness from abroad may be spilling over into the US, which cools expectations for a Fed increase in interest rates. And, as long as we stay in a low interest rate environment, that’s good news to stocks because the other asset classes aren’t as attractive on paper. Confused? Unfortunately, that’s how these markets work and why you want a professional wealth manager helping you.

Markets don’t always go up. And 2015 may go down as only the 2nd losing year for the stock market in the last 12. But that doesn’t mean that the Grim Reaper is lurking around every corner. It’s just part of a market cycle. By staying invested in a well-diversified portfolio made up of multiple asset classes, you can fend off the evil the market throws at you from time to time and come out unscathed. But you need to be disciplined and controlled, something a good Financial Sherpa can help you with. Don’t let emotions take over, which could haunt you for the rest of your life. Know that a disciplined investor looks beyond the concerns of today to the long-term growth potential of markets.

Here’s to a not-so-scary October. Happy Halloween!