Market Update: September 9, 2014

August 2014

The S&P 500 index returned 4.00% in August and ended the month eclipsing the 2000 point milestone for the first time. Strong August gains brought YTD returns on the index to 9.89%. August was also a good month for small cap stocks. The S&P Small Cap 600, which lost 5.5% in July, recovered 4.3% in August landing the small cap index back into positive territory YTD.

Looking from the top down, overall it was a good month for equities with the MSCI World Index returning 2.2%.  However, in overseas stock markets, the results were mixed.  The MSCI European index returned 0.42%. The MSCI Japanese index lost 2.2%.  And the MSCI Pacific ex Japan index returned a meager 0.28%. Emerging markets were up more uniformly. The MSCI Emerging Market index added a healthy 2.25%, leaving three-month returns on the index at 7% and bringing YTD returns on the Emerging Market index to 10.63%, making it one of the most attractive asset classes. What a difference a year can make.

Confounding the experts, fixed income indices had strong performance in August across the board. Both medium and long term treasury yields tumbled. The yield on the 10-year Treasury note finished at 2.35%. The yield on the 30-year Treasury bond closed at 3.08%.  European bond yields hit record lows. Germany’s government borrowing costs fell briefly below 1%, helping to push down yields on sovereign debt in other European countries.  The yields on Italy’s 10-year bonds fell to a record low of 2.65%.

Commodities had another lackluster month.  With the exception of industrial metals, all sectors of the S&P GSCI declined. Despite geopolitical conflicts in Ukraine, Gaza and Iraq, volatility as measured by the S&P 500 VIX short-term futures ticked lower. Gold prices moved modestly higher with the month end spot price fixed at $1,285.75 per ounce.

Words of financial wisdom - "Steer your vessel with care. When sailing upon the seas of risk, build your portfolio as you would your boat, with the strength to sail safely through any storm."  

In The News:

Investment Plans and Forecasts Don’t Mix

New York Times
By Carl Richards | July 1, 2013

While it may be fun to chat about what the market might do next at your neighborhood barbeque, don’t kid yourself. What we know about the market comes down to a bunch of guesses. Instead of relying on forecasts to dictate our financial decisions, Carl Richards suggests focusing on investing basics.
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Seven Truths Investors Simply Cannot Accept
Yahoo Finance
By Josh Brown | July 23, 2014

Investors learn important truths, but sometimes choose to suspend this knowledge when it feels better not to be encumbered by it. Here are several examples.
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The Right Way to Invest Globally
Wall Street Journal
By Liam Pleven | July 25, 2014

U.S. Investors Have Ramped Up Their Holdings of Foreign Stocks, But Some Do It the Wrong Way. An advisor recommends funds from Dimensional that allocate their investments across many countries, such as the DFA Large Cap International Portfolio, which invests in developed markets, and the DFA Emerging Markets Portfolio.
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Buttonwood: Practice Makes Imperfect
The Economist
From the Print Edition | August 9, 2014

Even experienced fund managers don't beat the market.  The harder I practice, the luckier I get,” said Gary Player, one of history’s greatest golfers. And it is a widespread belief that experienced professionals are a lot better than neophytes. But is that true of fund managers? A new study suggests that the answer is distinctly mixed
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The Decline and Fall of Fund Managers
Wall Street Journal
By Jason Zweig | Aug 22, 2014

The debate about whether you should hire an “active” fund manager who tries to beat the market by buying. Performance investing has enjoyed a remarkably long life cycle, but the costs of active investment are so high and the incremental returns so low that, for clients, the money game is no longer a game worth playing. Investors—both institutions and individuals—are increasingly shifting toward indexing. As acceptance of indexing grows, clients and managers have an opportunity to stop focusing on price discovery (which has made our markets so efficient) and refocus on values discovery, whereby investment professionals can help investors achieve good performance by structuring an appropriate, long-term investment program and staying with it.
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The Strange Allure of Higher Fees
New York Times
By Carl Richards | September 2, 2014

If you insist on spending more, then buy a fancier car. At least you’ll get the sport package for your money. Selecting the most expensive investment, however, doesn’t get you a better result. It just gets you a lower net return.
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Hesitating on the High Board of Investing
New York Times
By Jeff Sommer | August 16, 2014

Should you tiptoe into stocks, or take the plunge? So long as you've diversified, a big splash is often the best but the decision is entirely personal.
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CAPE Fear: Valuation Ratios and Market Timing
Dimensional Fund Advisors
By Weston Wellington | September 5, 2014

Many investors think relying on the CAPE ratio—the Cyclically Adjusted Price / Earnings ratio—is a sensible way to improve portfolio results by periodically adjusting equity exposure when the ratio reaches a certain level. Does that work?
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Building Global Portfolios
Dimensional Fund Advisors
Marlena Lee | September 4, 2014

Key issues to consider when determining a suitable asset allocation include the broad split between equities and fixed income as well as the specific characteristics within those allocations. The diverse needs and objectives among investors require a systematic approach that carefully examines the tradeoffs involved. The structure of Dimensional’s global portfolios shows how these decisions can be addressed.
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Evaluating the Impact of 2014 SEC Money Market Reforms
Dimensional Fund Advisors | September 9, 2014

This Issue Brief explains the three main pillars of the recent SEC's money market reform package. Safety and liquidity remain top priorities for corporations, and these changes could provide a catalyst for institutions to re-visit cash management programs and allocations. For investors willing to take on some additional term risk through a systematic, market-driven approach, an ultra-short duration fixed income solution may be able to generate additional yield while being exposed to slightly greater volatility.
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