News Archive - 11.10.2010
Edition 2010-5 of CSI News, as of November 10, 2010
A. Market Index Performance through 3Q2010
The first three quarters of 2010 have been a rollercoaster ride for equity investors. Monthly returns on the S&P 500 Stock Index switched from positive to negative or vice versa in six out of the nine months.
Investment grade bonds were the only sector making steady upward progress. Even there, the trend was not unbroken. The Barclay’s Capital U.S. Aggregate Bond Index fell 0.12% in March.
The following table captures the statistical picture for each of the three quarters and for the year through September 30th.
The dramatic increase in volatility was accompanied by another disturbing reality: when markets crater, historic correlations between market sectors disappear. They all go to 1.00. The visual proof is evident in Chart 1.
Disclosure:
Indexes are unmanaged and investors are not able to invest directly into any index.
B. Financial Market Index performance in the eleven calendar quarters through September 2010
Equity markets worldwide have made major moves from their lows at the end of February in 2009. Chart 2 shows the advances, but also highlights a troubling concern for most investors. Will the progress continue? Or should we expect continued waffling, hopefully trending upward?
The equity market environment is reflecting our anemic economic recovery, persistent high unemployment, escalating costs to service federal and state debts, political disharmony and generalized apprehension about America’s future. Finding a pathway back to sustainable levels of social security, health care, military and infrastructure expenditure will require sacrifices we seem not ready to accept as a nation. In the meantime, we stumble on. And the markets mirror this irresolution.
Chart 3 graphs the market index patterns since omens of the financial meltdown first surfaced late in 2007.
The EAFE and large cap U.S. markets are now 75% and 83%, respectively, of their level at the end of 2007. Smaller cap U.S. stocks and emerging market stocks are 93% to 97% back to their prior tops.
C. Coping with the troubling market environment
Institutional investors and many wealthy individuals and families are constantly looking at investment policy alternatives and investigating less conventional techniques for dampening portfolio volatility and enhancing investment returns. Taxable investors, realistically anticipating higher taxes on their investment gains, have an even greater incentive to find a substitute for modern portfolio theory’s asset allocation regimes. Concerns about the future of their bond portfolios if (when?) yields rise and market values drop reflexively only add to the appetite for better investment management options.
Respected investment consulting firms like Cambridge Associates, Evaluation Associates, Mercer and Watson Wyatt have for years encouraged clients to allocate capital to alternative strategies, including private equity, real estate, commodities, currencies and high yield bonds among others.
Disclosures:
The views expressed are not necessarily the opinion of FSC Securities Corporation, and should not be construed directly or indirectly, as an offer to buy or sell any securities mentioned herein. Individual circumstances vary. Investing is subject to risks including loss of principal invested. No investment strategy, such as asset allocation, can assure a profit against loss. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed.
In general, the bond market is volatile as prices rise when interest rates fall and vice versa. This effect is usually pronounced for longer-term securities. Any fixed income security sold or redeemed prior to maturity may be subject to a substantial gain or loss.
The investor should note that vehicles that invest in lower-rated debt securities (commonly referred to as junk bonds) involve additional risks because of the lower credit quality of the securities in the portfolio. The investor should be aware of the possible higher level of volatility, and increased risk of default.
Investments in stocks of small companies involve additional risk. Smaller companies typically have a higher risk of failure, and are not as well established as larger-chip companies. Historically, smaller-company stocks have experienced a greater degree of market volatility than the overall market average.
Investments in real estate have various risks including possible lack of liquidity and devaluation based on adverse economic and regulatory changes.
The price of commodities, such as gold and currency, is subject to substantial price fluctuations of short periods of time and may be affected by unpredictable international monetary and political policies. The market for commodities and currency is widely unregulated and concentrated investing may lead to higher price volatility.
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