September 2015 Financial Markets Summary
It has been an eventful couple of weeks for global markets, and the wild ride may not be over. The question is whether this represents a correction or the start of a bear market. The Fed has not even begun tightening yet, and typically a bear market occurs after there has been a lengthy period of rising rates. Also, the fundamental U.S. story is still a good one, with robust job growth, accelerating housing, improving consumer spending, and solid corporate balance sheets. So the current swoon is painful, but likely temporary, and as we have suggested for more than a year, most likely an overdue correction.
There is every indication that the Federal Reserve will begin to increase the Fed Funds Rate by 0.25% sometime this year. Nothing is for certain, but Fed chair Yellen has made it clear this is the path they will follow. Noted economist Jeremy Siegel says “If financial and commodity markets calm, I can see a good rally in the fourth quarter after the Federal Reserve acts on interest rates, no matter what that action is. The pace of higher rates is far more important than when it begins, and the Fed has already indicated it will go slowly.”
Some clients have asked us why China is being blamed for the current global market weakness. While we are not sure “blamed” is the right word, there is clear consensus that a slower Chinese economy will affect the world. In truth, China has gone from a period of 9% (or higher) annual growth to a still robust 6% growth. Most countries, including the U.S., would be thrilled with that kind of economic growth. And the slowdown is to be expected, as China moves from an emerging economy to one starting to resemble a developed economy. Speculation about China has fueled a global panic, mostly forgetting the Chinese central government has a vast financial arsenal at its disposal, including nearly $4 trillion in currency reserves, a massive current account surplus, and plenty of room to lower rates (none of which are available to our own Fed). Just as we hear the phrase “Don’t fight the Fed”, we would advise “Don’t underestimate Beijing’s ability to smooth the way.”
Some investors were considering selling their more defensive holdings earlier in the year, before the recent spike in market volatility. But a dose of reality, in the form of the current market downturn, probably changed their minds. Our ongoing advice: have a plan, and stick to it. Do not panic, for inevitably panic leads to self-inflicted wounds. If you invested $10,000 in a balanced portfolio on August 1, on August 31 you had $9,557. That’s it. You dropped 4.3%. Despite the media hype, there has been no carnage, no bloodbath, no meltdown.
In volatile times like these, it is important that investors consider the pressure their withdrawals may be putting on their portfolios. Protect the money needed from your portfolio over the next 3-5 years by keeping it in cash, CDs, or short-maturity bonds. Note the advantage of a diversified allocation over the long haul, below. As we always remind our readers, today’s headlines and tomorrow’s reality are seldom the same.
|Asset Index Category||Category||Category||Category||10-Year|
|2015 To-Date||3 Months||2014||Average|
|Dow Jones Industrials – Large Cos||-7.8%||-8.2%||7.5%||4.6%|
|S&P 500 Index – Large Companies||-4.2%||-6.4%||11.3%||4.9%|
|S&P 400 Index – Mid-Size Companies||-2.5%||-7.1%||8.2%||7.1%|
|Russell 2000 Index – Small Companies||-3.8%||-6.9%||3.5%||5.7%|
|MSCI EAFE Index – Developed Intl.||-0.2%||-8.5%||-4.9%||4.0%|
|MSCI EM Index – Emerging Markets||-12.8%||-17.6%||-4.6%||3.1%|
|Short-Term Domestic Bonds||0.5%||-0.5%||1.1%||2.8%|
|Global Government Bonds||-3.1%||-2.0%||1.7%||3.7%|
|Bloomberg Commodity Index||-12.8%||-9.9%||-24.4%||-4.9%|
|Dow Jones U.S. Real Estate||-6.3%||-5.4%||27.7%||5.5%|
|World Allocation Global stocks, bonds, commodities||-3.9%||-6.4%||1.5%||4.8%|
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.