Quarterly Market Review

Transcription

1 Quarterly Market Review Third Quarter 2014

2 Quarterly Market Review Third Quarter 2014 This report features a summary and analysis of current conditions, world capital market performance and a timeline of certain newsworthy events over the last quarter. It begins with our commentary, proceeds to a global overview, then details the returns of stock and bond asset classes in the US and international markets. We hope you enjoy our new report format and would love to hear your feedback in case there is anything we could be doing better. Overview: Market Summary Broad Market Returns US Stock Market Performance World Asset Classes US Stocks International Developed Stocks Emerging Markets Stocks Select Country Performance Real Estate Investment Trusts (REITs) Commodities Fixed Income 2

3 Market Summary Third Quarter 2014 What a wild ride the third quarter turned out to be! It is often said that markets need both fear and greed to perform, and we had a healthy dose of both during the quarter. We believe there are four factors contributing to the drawdown of the equity markets: geopolitical fears, Ebola fears, a strong U.S. dollar, and weakening global growth. Despite these four factors, there are plenty of reasons to remain actively invested in this market including the strong housing sector, low oil and commodity prices, growing company earnings, low interest rates, and accommodative central banks. The U.S. remains in a slow but solid mid-cycle expansionary phase. Economic momentum has moved along well enough that the Federal Reserve has reduced its monetary stimulus program and intends to end its bond-buying program in the fourth quarter. This has led to concerns about rising interest rates from recordlow levels, which current estimates project sometime in For now, though, U.S. markets seem driven by capital spending, consumption, credit/banking, manufacturing, construction and housing. Falling oil and other commodity prices have also given consumers a break at the gas pump and a few more dollars for discretionary spending. Europe and Japan continue to disappoint. Their sluggish economic and job growth provides the backdrop to even greater expectations of monetary easing as well as currency weakness. Emerging markets are in various stages of a market recovery. China, which has been the economic engine for the emerging markets, is struggling to maintain growth amid credit excesses and real estate imbalances. Geopolitical risks remain high as Russia, Ukraine, the Middle East and other areas present additional perils. But this part of the market boasts more attractive valuations than we find in U.S. equities, and money often flows toward areas of lower valuations in time. associated with the management of an actual portfolio. Market segment (index representation) as follows: US Stock Market (Russell 3000 Index), International Developed Stocks (MSCI World ex USA Index [net div.]), Emerging Markets (MSCI Emerging Markets Index [net div.]), Global Real Estate (S&P Global REIT Index), US Bond Market (Barclays US Aggregate Bond Index), and Global Bond ex US Market (Citigroup WGBI ex USA 1 30 Years [Hedged to USD]). The S&P data are provided by Standard & Poor's Index Services Group. Russell data Russell Investment Group , all rights reserved. MSCI data MSCI 2014, all rights reserved. Barclays data provided by Barclays Bank PLC. Citigroup bond indices 2014 by Citigroup. 3

4 Market Summary (continued) Third Quarter 2014 As you can see on the chart below, news headlines do not always line up with market movements, so it s best not to take specific headlines too seriously when it comes to your long-term investing decisions. We view the recent equity market correction as minor, presenting an opportunity for valuations to reset and for investors to gain clarity around the current risk factors. The good news is, historical data shows the October through December period has often been among the most bullish three-month stretches for the stock market 1. These headlines are not offered to explain market returns. Instead, they serve as a reminder that investors should view daily events from a longer-term perspective and avoid making investment decisions based solely on the news. Graph Source: MSCI ACWI Index. MSCI data MSCI 2014, all rights reserved. It is not possible to invest directly in an index. Performance does not reflect the expenses associated with management of an actual portfolio. Past performance is not a guarantee of future results S&P 500 posts 7th straight quarter of gains, Adam Shell September 30,

5 Market Summary (Continued) Third Quarter 2014 Clients will always get nervous during times of extreme volatility, but over time they will trust that fear and greed are necessary components of the financial markets. There are many well-known and perhaps worn-out quotes from highly successful investors extolling the virtues of patience, proper planning, and a steady hand at the wheel. But many of these quotes neglect to emphasize the importance of a strategy which is appropriately allocated, with consideration for the needs of that particular investor and the investment time frame they have available to them. Advisors who have properly diversified client portfolios for full asset class diversification may appear no smarter than those who have failed to do so in the short run. This is because all asset classes may decline during "feardriven market cycles; however, the advantage of proper diversification is that the portfolio rebalancing opportunities afforded to properly diversified portfolios AFTER the fear subsides will typically prove opportunistic. As always, please feel free to contact us with any questions or to schedule a meeting. Alpha Fiduciary alphafiduciary@alphafiduciary.com 5

6 Broad Market Returns The broad US equity market had flat-to-slightly-positive returns for the quarter. Small cap stocks in the US underperformed large cap stocks, with US small cap indices posting negative returns. Most equity markets outside the US had negative performance in US dollar terms. Currency movements played a role; the dollar appreciated against most currencies. In developed markets outside the US, large cap indices outperformed small cap indices. In the emerging markets, however, small cap indices outperformed large cap indices. Value underperformed growth indices in developed markets across size ranges, but in emerging markets value outperformed growth in large caps but underperformed in small caps. REITs recorded negative returns in the US and in developed non-us markets. S&P 500 Index 1.13 Barclays US Aggregate Bond Index One-Month US Treasury Bills Russell 1000 Value Index MSCI Emerging Markets Small Cap Index (net div.) Dow Jones US Select REIT Index MSCI Emerging Markets Value Index (net div.) MSCI Emerging Markets Index (net div.) S&P Global ex US REIT Index (net div.) MSCI World ex USA Index (net div.) MSCI World ex USA Value Index (net div.) Russell 2000 Index MSCI World ex USA Small Cap Index (net div.) Russell 2000 Value Index associated with the management of an actual portfolio. The S&P data is provided by Standard & Poor's Index Services Group. Russell data Russell Investment Group , all rights reserved. MSCI data MSCI 2014, all rights reserved. Dow Jones data (formerly Dow Jones Wilshire) provided by Dow Jones Indexes. Barclays data provided by Barclays Bank PLC. 6

7 US Stocks The US equity market recorded slightly positive performance, and large caps significantly outperformed small caps for the quarter. Value underperformed growth across all size ranges, with the exception of micro cap indices. Ranked Returns for the Quarter (%) Large Cap Growth Large Cap Marketwide Large Cap Value Small Cap Growth Small Cap Small Cap Value World Market Capitalization US Period Returns (%) Asset Class YTD 1 Year 3 Years* 5 Years* 10 Years* 51% US Market $21.8 trillion Marketwide Large Cap Large Cap Value Large Cap Growth Small Cap Small Cap Value Small Cap Growth * Annualized associated with the management of an actual portfolio. Market segment (index representation) as follows: Marketwide (Russell 3000 Index), Large Cap (S&P 500 Index), Large Cap Value (Russell 1000 Value Index), Large Cap Growth (Russell 1000 Growth Index), Small Cap (Russell 2000 Index), Small Cap Value (Russell 2000 Value Index), and Small Cap Growth (Russell 2000 Growth Index). World Market Cap represented by Russell 3000 Index, MSCI World ex USA IMI Index, and MSCI Emerging Markets IMI Index. Russell 3000 Index is used as the proxy for the US market. Russell data Russell Investment Group , all rights reserved. The S&P data are provided by Standard & Poor's Index Services Group. 7

8 International Developed Stocks International developed broad market indices measured in US dollars underperformed both the US and emerging markets. Large caps continued to outperform small caps. Value underperformed growth across all size segments. The US dollar strengthened against most currencies during the quarter. Ranked Returns (%) Growth Large Cap Value US currency Local currency Small Cap World Market Capitalization International Developed Period Returns (%) Asset Class YTD 1 Year 3 Years** 5 Years** 10 Years** 38% International Developed Markets $16.3 trillion Large Cap Small Cap Value Growth * Annualized associated with the management of an actual portfolio. Market segment (index representation) as follows: Large Cap (MSCI World ex USA Index), Small Cap (MSCI World ex USA Small Cap Index), Value (MSCI World ex USA Value Index), and Growth (MSCI World ex USA Growth). All index returns are net of withholding tax on dividends. World Market Cap represented by Russell 3000 Index, MSCI World ex USA IMI Index, and MSCI Emerging Markets IMI Index. MSCI World ex USA IMI Index used as the proxy for the International Developed market. MSCI data MSCI 2014, all rights reserved. 8

9 Emerging Markets Stocks Broad market emerging markets indices outperformed developed markets outside the US. Ranked Returns (%) US currency Local currency Unlike their developed markets counterparts, small cap indices outperformed large cap indices for the quarter. Value indices outperformed growth indices in large caps but underperformed in small caps. Small Value The US dollar strengthened against most currencies during the quarter. Large Cap Growth 0.37 World Market Capitalization Emerging Markets 11% Emerging Markets $4.5 trillion Period Returns (%) Asset Class YTD 1 Year 3 Years** 5 Years** 10 Years** Large Cap Small Cap Value Growth * Annualized associated with the management of an actual portfolio. Market segment (index representation) as follows: Large Cap (MSCI Emerging Markets Index), Small Cap (MSCI Emerging Markets Small Cap Index), Value (MSCI Emerging Markets Value Index), and Growth (MSCI Emerging Markets Growth Index). All index returns are net of withholding tax on dividends. World Market Cap represented by Russell 3000 Index, MSCI World ex USA IMI Index, and MSCI Emerging Markets IMI Index. MSCI Emerging Markets IMI Index used as the proxy for the emerging market portion of the market. MSCI data MSCI 2014, all rights reserved. 9

10 Select Country Performance In US dollar terms, the US recorded the highest performance in developed markets as the dollar rose. European countries recorded some of the lowest performance among developed market countries. In emerging markets, Middle Eastern countries posted strong positive returns. However, relative underperformance in the materials and energy sectors negatively affected some of the larger emerging markets countries, which had a bigger impact on emerging markets indices. Ranked Developed Markets Returns (%) Ranked Emerging Markets Returns (%) US Israel Singapore Japan Hong Kong Ireland Belgium Switzerland UAE Egypt Qatar Thailand Philippines Indonesia Czech Republic India Denmark China 1.78 Netherlands Mexico 1.59 Canada Peru Finland Malaysia United Kingdom Poland Sweden Taiwan Spain Korea Australia South Africa Norway Chile New Zealand France Italy Germany Austria Portugal Colombia Brazil Turkey Hungary Russia Greece associated with the management of an actual portfolio. Country performance based on respective indices in the MSCI World ex US IMI Index (for developed markets), Russell 3000 Index (for US), and MSCI Emerging Markets IMI Index. All returns in USD and net of withholding tax on dividends. MSCI data MSCI 2014, all rights reserved. Russell data Russell Investment Group , all rights reserved. UAE and Qatar have been reclassified as emerging markets by MSCI, effective May

11 Real Estate Investment Trusts (REITs) REITs lost ground for the quarter in the US and non-us markets. Ranked Returns (%) US REITs Global REITs (ex US) Total Value of REIT Stocks Period Returns (%) 44% World ex US $392 billion 234 REITs (22 other countries) 56% US $504 billion 91 REITs Asset Class YTD 1 Year 3 Years** 5 Years** 10 Years** US REITs Global REITs (ex US) * Annualized associated with the management of an actual portfolio. Number of REIT stocks and total value based on the two indices. All index returns are net of withholding tax on dividends. Total value of REIT stocks represented by Dow Jones US Select REIT Index and the S&P Global ex US REIT Index. Dow Jones US Select REIT Index used as proxy for the US market and S&P Global ex US REIT Index used as proxy for the World ex US market. Dow Jones US Select REIT Index data provided by Dow Jones. S&P Global ex US REIT Index data provided by Standard and Poor s

12 Commodities Commodities turned broadly negative during the third quarter. The Bloomberg Commodity Index fell 11.83%. Corn had the worst quarter overall, returning %. Sugar and soybeans also led the decline, returning % and %, respectively. Coffee, the biggest gainer, returned 7.95%. Live cattle was up modestly, returning 5.34%. Ranked Returns for Individual Commodities (%) Coffee Live Cattle Zinc Aluminum Copper Gold Natural Gas Heating Oil WTI Crude Oil Lean Hogs Unleaded Gas Nickel Brent Oil Cotton Soybean Oil Silver Wheat Soybeans Sugar Corn Period Returns (%) Asset Class YTD Q3 1 Year 3 Years** 5 Years** 10 Years** Commodities * Annualized Past performance is not a guarantee of future results. Index is not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. All index returns are net of withholding tax on dividends. Dow Jones-UBS Commodity Index Total Return data provided by Dow Jones. 12

13 Fixed Income Interest rates across all US fixed income markets were mixed during the third quarter. The 10-year Treasury note ended the period at 2.49%, generally unchanged from the previous quarter. The 30-year Treasury bond finished with a yield of 3.21%, registering a decline of 13 basis points. While intermediate- and long-term rates declined, short-term rates increased. The 5-year Treasury note ended the period at 1.78%, up 16 basis points, while the 2-year Treasury note was up 13 basis points, finishing at 0.59%. US Treasury Yield Curve /30/13 6/30/14 9/30/14 Long-term corporate bonds returned just 7 basis points in the quarter but are ahead 11.30% for the year. Intermediate-term corporate bonds lost 14 basis points in the quarter but are still ahead 3.47% for the year. Municipal revenue bonds slightly outpaced municipal general obligation bonds by 1.97% vs. 1.48% for the quarter. Long-term municipal bonds continue to outperform all other areas of the curve, returning 2.69% for the period and 13.01% for the year. 0 1 Yr Year US Treasury 5 Yr 10 Yr Bond Yields across Issuers (%) 4.11 State and Local Municipals 2.57 AAA-AA Corporates 30 Yr 3.24 A-BBB Corporates Period Returns (%) * Annualized Asset Class YTD 1 Year 3 Years** 5 Years** 10 Years** BofA Merrill Lynch Three-Month US Treasury Bill Index BofA Merrill Lynch 1-Year US Treasury Note Index Citigroup WGBI 1 5 Years (hedged to USD) Long-Term Government Bonds Barclays US Aggregate Bond Index Barclays US Corporate High Yield Index Barclays Municipal Bond Index Barclays US TIPS Index associated with the management of an actual portfolio. Yield curve data from Federal Reserve. State and local bonds are from the Bond Buyer Index, general obligation, 20 years to maturity, mixed quality. AAA-AA Corporates represent the Bank of America Merrill Lynch US Corporates, AA-AAA rated. A-BBB Corporates represent the Bank of America Merrill Lynch US Corporates, BBB-A rated. Barclays data provided by Barclays Bank PLC. US long-term bonds, bills, inflation, and fixed income factor data Stocks, Bonds, Bills, and Inflation (SBBI) Yearbook, Ibbotson Associates, Chicago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield). Citigroup bond indices 2014 by Citigroup. The BofA Merrill Lynch Indices are used with permission; 2014 Merrill Lynch, Pierce, Fenner & Smith Incorporated; all rights reserved. Merrill Lynch, Pierce, Fenner & Smith Incorporated is a wholly owned subsidiary of Bank of America Corporation. 13