August 2014 Financial Markets Summary

There is no question that the markets ended July with a thud.  As if there were some triple-witching spell going on, Argentina’s default on its government bonds, bad news from Portugal’s largest bank, and warnings from companies who are closing or reducing operations in Russia, combined to grease the skids on a market that has been almost impervious to these kinds of things year to-date.  This happened despite continued good economic news that was released just a day before.  Sometimes the markets need to take a breather, and perhaps this is the start of a long-anticipated correction.  After all, it’s been more than two years without a 10% pullback.  If we actually see some indication we are in correction mode, it could remind investors why a diversified allocation is important.

On the other hand, we have seen no herd instinct by the average investor to move dollars into stocks.  And overall prices for stocks are not unreasonable, even if there are some sectors whose big gains appear to have gotten a bit long-in-the-tooth.  Inflation as measured by the Federal Reserve remains low, and the Fed is in no hurry to move interest rates higher from their current historic lows.  The economy may be staggering upward, but it is certainly not overheated.  Employment numbers look decent, until you look under the hood and discover that much of the new jobs created are part-time, not full-time. This is all to say that it seems unlikely any correction we might have could turn into a bear market.  Diversification, anyone?

There are a lot of political flashpoints around the world right now.  But as we noted in a recent Weekly, the small footprint of the current war zone countries within the global economy is teeny, other than through oil production.  All of the war zone countries combined account for less than 3% of world GDP.  Yet any of these flashpoints could ignite into something bigger anytime, resulting in a short-term negative effect on world markets.  This seems like one more reason to be truly diversified.

We have written previously about America’s huge domestic energy renaissance.  It has already resulted in a massive change in the amount of dollars we send overseas every day, and this will only get better.  Domestic oil production has more than doubled in the last five years, while the amount of oil we import is at its lowest point in 25 years.  Many investors will want to be sure their diversified portfolios include some American and Canadian companies that are part of this energy rebirth.  Be diversified.

Precious metal stocks, energy, real estate, and healthcare are the leading sectors this year.  As we said last month, we would urge caution and patience before you jettison a holding just because it is under-performing this year.  More importantly, protect the money you might need from your portfolio over the next 3-5 years by keeping it in cash, CDs, or short-maturity bonds, despite their unattractive yields.  The rest of your portfolio should be invested in a truly diversified mix that matches your risk tolerance and long-term goals. Finally, we remind our readers that today’s headlines and tomorrow’s reality are seldom the same.

Asset Index Category Three Month 2014 YTD 2013 10-Year
S&P 500 Index – Large Companies 2.5% 4.5% 29.6% 5.8%
S&P 400 Index – Mid-Size Companies 1.1% 2.1% 31.5% 9.0%
Russell 2000 Index – Small Companies -0.6% -3.7% 37.0% 7.3%
MSCI EAFE Index – Developed Intl -0.2% 0.9% 19.4% 4.2%
MSCI EM Index – Emerging Markets 7.1% 6.2% -4.9% 9.7%
S&P Global Natural Resources Index 2.9% 5.7% 1.5% 9.5%
London Fix Gold Price Index 1.8% 6.7% -27.3% 12.8%
Total  U.S. Bond Index 0.9% 3.7% -2.2% 4.8%
Municipal Bond Index 1.2% 4.7% -2.3% 3.8%
Emerging Market Bond Index 2.9% 6.1% -7.2% 8.7%
Long-Short Equity Index 1.2% 1.8% 14.6% 6.1%
World Allocation (ACWI) Index 1.5% 3.7% 10.1% 7.3%

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment, strategy, or product or any non-investment related content, made reference to directly or indirectly in this newsletter, will be suitable for your individual situation, or prove successful. This material is distributed by PDS Planning, Inc. and is for information purposes only.  Although information has been obtained from and is based upon sources PDS Planning believes to be reliable, we do not guarantee its accuracy.  It is provided with the understanding that no fiduciary relationship exists because of this report.  Opinions expressed in this report are not necessarily the opinions of PDS Planning and are subject to change without notice.  PDS Planning assumes no liability for the interpretation or use of this report. Consultation with a qualified investment advisor is recommended prior to executing any investment strategy. No portion of this publication should be construed as legal or accounting advice.  If you are a client of PDS Planning, please remember to contact PDS Planning, Inc., in writing, if there are any changes in your personal/financial situation or investment objectives.  All rights reserved.