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Market Update: August 12, 2015

John Gorlow | Aug 12, 2015

 JULY REVIEW


The S&P 500 ended July up 2% despite early and late month volatility in both Europe and China. Following a solid first half, mid and small cap U.S. stocks lagged large caps for the month. The S&P MidCap 400 finished July with flat results, while the S&P SmallCap 600 declined 0.85%. Growth continued to outperform value as the S&P 500 Growth index returned 3.62% while the S&P 500 Value index rose only slightly.


Fixed income results were generally positive in July. The Barclays U.S. Aggregate Bond Index returned 0.70%. High Yield Bonds gained 2% and investment grade credits returned 1%.


Outside the U.S., developed markets returned 1.6%, but emerging markets declined 7%. European stocks gained 3.77% thus recovering all their losses suffered in June. Japanese stocks returned 1%.


Commodities declined significantly in July with the Dow Jones Commodity Index ending the month down 10.62%. The Energy sector saw the biggest drop as the price of oil continued to fall while the U.S. dollar strengthened following hints from the U.S. Federal Reserve that a first rate-hike may be expected in September. As for Gold it fell 6.7%.


HOW TO BEHAVE IN A FINANCIAL CRISIS?


Investors must keep in mind that the world has faced many financial crises. As Weston Wellington (DFA, VP) recently pointed out, looking back at the Asian Financial Crisis of 1997, the Dow Jones Industrial Average tumbled 554 points in a single day. At the time it was the largest single point drop in the history of the Dow Jones Industrial Average (DJIA). For many investors it was a very unnerving time and some may have been encouraged by the volatility to retreat to the so called “safety of the sidelines”. A year later the DJIA was up almost 17%.  Two years later it was up over 45%. There you have it.


Now watch W. Wellington turn the clock back a bit and imagine you had successfully predicted the Greek default. What would you have predicted at the time? You probably would have expected the Greek market to drop. And you would have been correct. It fell 25% according to MSCI data for the first 6 months of 2015. Among 17 European Union stocks markets tracked by MSCI only four of them underperformed the U.S (1.7%).  The other 13 outperformed the U.S. and many had impressive double digit rates of return including Hungary (26.5%), Denmark (19.5%), Ireland (12.7%), Portugal (10.2%) and Italy (10.1%). Many an investor, even now, will be surprised to learn of these numbers.


So given the difficulty of predicting events and the even greater challenge of predicting how other investors react to these events, the most reliable way for investors to accumulate and preserve wealth consists  of adopting and maintaining a broadly diversified strategy diversified across companies, industries, countries, and currencies.


Listen to the wisdom of W. Wellington, "the idea that we should dip and dart and reduce our exposure to risky assets based on some prediction that we or others might make more often than not leads to frustration and failure to capture the rates of return that the world’s capital markets have to offer".


Allow me to remind you that as rough as the market may be at times and however mediocre the short-term results, my advice remains consistent: stay diversified, remain disciplined and focus on the long-term.