Covenant Weekly Market Synopsis as of October 2, 2015

October 5, 2015

Although last week saw positive moves across most asset classes, the third quarter served as a reminder that risky assets are risky. As concerns around China’s growth rate and uncertainty about the timing of a Fed rate hike competed for top billing in news headlines, risky asset classes sold off and at the sub-asset class level recorded some of the worst quarters since 2011:

Q3 2015 Performance

Emerging Market Equities   -18%
Commodities   -14%
Small Cap   -12%
EAFE Equities   -10%
S&P 500   -6%
High Yield   -4%
REITS   +1%
Barclays Aggregate Bond Index   +1%

Additional market detail can be found here.

The volatility in Q3 was elevated, though it was not unprecedented. Moreover, the uncertainty resulting from divergent central bank monetary policies and tepid global growth will likely provoke heightened volatility levels for the foreseeable future. The good news is that volatility can produce investment opportunity; the bad news is that most people are overly reactive to volatility and end up making poor investment decisions. 

Intentional Investing: In today’s world of ceaseless sound bites and 24/7 news cycles, it is very easy for investors to get “caught in the moment” leading to emotional, rather than rational, investment decisions. Now, more than ever, it is important to think fast and slow to identify the signal from the noise in the information flow and avoid emotional decisions. Successful investing in this new era of voluminous and rapid information flow requires having a plan (including a diversified portfolio with exposure to multiple asset classes) and sticking to it, lest you end up as a statistical casualty like the average investor in the Fidelity Magellan fund between 1977 – 1990. Over this 14-year timeframe, portfolio manager Peter Lynch delivered remarkable performance averaging 29% per year. Unfortunately, the average Magellan investor actually lost money succumbing to emotional impulses in which they bought at the highs and sold at the lows.

Economic Wrap-Up: In August, Real consumption increased 0.4% month-over-month (m/m) and is on track to match the 3.6% annualized growth rate recorded in Q2. However, inflation remains AWOL, with annual core inflation rate at 1.3% (well below the Fed’s target rate of 2%). U.S. Consumer Confidence rose to 103 (from 101.3). The September ISM manufacturing index fell to 50.2 (from 51.1 – a level above 50 indicates expansion), as the strong US dollar continues to put downward pressure on foreign demand. September payroll data was weak as only 142,000 jobs were added (vs. a consensus estimate of 200,000) and the average annual earnings growth remained flat at 2.2%. Taken together this data confirms our long-held view that the U.S. economy, while expanding, is unable to hit on all cylinders in a low global-growth environment.

Be good,

Jp