After an unusually long period of market calm, investors’ anxiety was piqued early in the quarter by the escalation of geopolitical tensions in Ukraine, a number of intensifying conflicts in the Middle East, the failure of a major Portuguese bank, and the Argentine government’s technical default. The accompanying resurgence of stock market volatility did not come as a complete surprise. Markets bounced back in August on positive economic reports including a pick-up in the manufacturing and non-manufacturing indices, falling ongoing unemployment claims, accelerating motor vehicle sales, and rising consumer confidence. The S&P 500 closed at an all-time high of 2011.36 on September 18 but retreated by quarter-end, finishing just slightly positive for the quarter. So far this year through September 30, the S&P 500 is up 8.33%.
European stock markets experienced a decline, which may have been due to the continent’s more challenging economic environment prompting the European Central Bank to expand their stimulus program. Developed markets as measured by the MSCI EAFE Index are slightly down for the year shedding -0.81% through September 30.
Global interest rates continued to move lower, especially in Europe where the yield on the Spanish ten-year Treasury is now below that of the U.S. Treasury Note – remarkable considering that only a few years ago Spain was considered to be near default on its debt. At home, Federal Reserve Open Market Committee (FOMC) Chair, Janet Yellen, continued her dovish stance indicating to markets that short-term interest rates may remain at historic low levels for much longer than most expect. The ten-year U.S. Treasury Note ended the quarter nearly unchanged. The September 30 yield was 2.51%.
Although stock market valuations look a bit elevated in developed markets, we believe they are fairly valued when the low interest rate and low inflation environment is taken into account. In the U.S., valuations are further supported by the continued upward trend in corporate profits. While Europe is not seeing the same profit trends, the region is stabilizing economically and the recent stock market corrections have brought valuation to more attractive levels. Although we anticipate some market volatility, we remain overweight in common stocks as we believe earnings growth, dividend growth, and economic improvement support higher stock prices.
The critical factor at this stage isn’t whether or not stock prices experience a temporary decline. Experience tells us that (at some point) they will. For investors, a key to riding out the natural volatility inherent in the stock market is to have a portfolio with a carefully constructed asset allocation. If you have not been in for an account review in some time, please give us a call. It is always good to get together to discuss strategy and to confirm that your asset mix is in line with your expectations.Some trust products and IRA contributions/balances are not a deposit, not FDIC insured by any federal government agency, not guaranteed by the bank and may go down in value.