With cooler weather on our doorstep and leaves beginning to change colors, it’s hard not to notice that fall is in the air. This means it’s time to pull out our favorite sweater and our secret chili or stew recipes and get ready for one of our favorite seasons of the year. After the heat of summer, we are always excited for the change into fall and the joy of tasty seasonal dishes, mmm—pumpkin everything.
It appears that global markets are looking to get into the fall spirit by adding their own variety of ingredients for all to chew on. During September these “ingredients” included economic news that has been divided, with the majority of positive news coming from the US, and the majority of negative data being delivered by our international friends. In the US, housing, manufacturing, employment, jobless claims, and consumer sentiment data were all on the rise. Emerging and developed international markets, however, continue to show signs of weakness and even recession.
Concerns exist over the US Fed raising interest rates and over the somewhat vague and not-very-well-received stimulus packages being announced by the ECB and foreign central bankers. Currency markets have been very volatile, with the US dollar remaining very strong. The strong dollar is troublesome because this strength may hurt earnings growth of US-based companies that sell or export to other countries (and possibly hurting our GDP). And finally we have social and political unrest in Asia, Middle East, Eastern Europe and South America (we are still waiting to hear from the Antarctic). So if we mix all these “ingredients” in a big old crock-pot of investing, we get great big stew of volatility with a side of worry.
If we use volatility as our guide then it would appear that a correction is underway. The volatility index has increased by 42% from the end of August through the time of this writing. Remember that the volatility index is the “worry” indicator (see our July letter), so market worry is on the rise. Large US stocks, as measured by the S&P 500 index, have declined 3.4% over the same period. Other areas of the globe have not been so fortunate, with losses closer to 7%-8% for broad commodity and international equity indices.
While no one likes to lose money, short-term volatility may provide opportunity for the long-term investor. For example, those making regular contributions to their retirement accounts benefit from dollar-cost-averaging, which is only possible because of volatility. Volatility can also provide opportunity to other investors to rebalance their portfolios—buying low and selling high.
During September we reduced exposure to developed international markets for many of our clients. At the same time, we maintained, or in some cases increased, clients’ emerging markets and commodities exposures. Our interest in these two areas has grown this year as emerging market equity indices turned positive after a multi-year period of declines (with one obvious exception being Russia). Despite their recent pullback, we believe that we bought and are buying into these areas at multi-year lows.
We have also increased cash holdings for many clients, as we believe that down days in the market will provide buying opportunities. To say it another way, we continue to believe that all the “ingredients” which are causing the increase in short-term volatility will result in some tasty long-term opportunities. As always call or email us with any questions you have or topics you would like to see covered.