Shock and Awe

The stock market along with the full force of the financial media rendered its version of shock and awe on unwitting investors; paralyzing some and forcing others into an early surrender. We strive to keep our independent advisors and their clients informed and provide non-emotional clarity to the news and events that matter. October proved to be a stern test of investor resolve as volatility spiked and stock prices fell quickly, only to rally back with vengeance.

Let’s put October into perspective. The stock market has been rallying for over five years and the rally will likely continue given the corporate earnings expectations and current price earnings multiples. Stock markets do not go straight up, although the past two years is as close as we can get to nirvana.

The stock market corrects within every year and over the long haul it averages 2.6 positive calendar years for every one year negative. This is great news for the patient long-term investor as the odds are in your favor if you stay in the game. The October intra-month correction stemmed from a handful of factors converging on the market in early October. There was anticipation of third quarter corporate earnings releases, a European economic slowdown or possible recession, EBOLA concerns, terrorist activity, Euro dollar weakness versus U.S. dollar strength, falling oil prices, the U.S. Federal Reserve ending quantitative easing and nervous investors hiding in the shadows of 2008.

The monthly numbers hid the daily thrill ride, but when the dust settled markets were little changed in October. On the relative strength of the U.S. economy, U.S. equities once again outperformed international stocks. For the month, the NASDAQ, S&P 500, and the Dow Jones Industrial Average had positive results of 3.09, 2.44 and 2.16 percent respectively. International results were mixed with the MSCI EAFE down -1.45 percent and the MSCI Emerging Markets up 1.18 percent for the month. Commodities prices fell during the month as oil declined by another $10 per barrel and gold declined on the firm U.S. dollar.

Like stock prices, interest rates had a wild ride of their own during the month, and ended October with lower U.S. Treasury rates. Five, ten and thirty year Treasury rates fell by 16, 17, and 14 basis points to yield 1.62, 2.35 and 3.07 percent respectively. During the height of the October equity market panic, the 10-year U.S. Treasury hit a monthly low yield of 1.85%. This flight to quality move was swift and rates immediately reversed course back above the two percent level. Lower interest rates across the yield curve helped produced a 0.98 percent monthly total return in the Barclays Aggregate Bond Index. All in all, bonds have been remarkably stable in 2014 and we expect this to continue into 2015.

Markets can move quickly, but remember portfolios are constructed to meet your financial goals which are long-term goals. Your investment time horizon should be a long-term one to match the duration of your goals. Results should be measured in years or multi-year time frames. The emotional struggle comes from focusing on market noise which forces the unwitting investor to measure results in days and weeks. Breakaway from the herd, become a long-term investor and begin thinking in years, not days.

Posted on November 6, 2014
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