Quarterly Market Review
This report features world capital market performance and a timeline of events for the last quarter. It begins with a global overview, then features the returns of stock and bond asset classes in the US and international markets.
The report also illustrates the performance of globally diversified portfolios and features a topic of the quarter.
Timeline of Events: Quarter in Review
Global equity markets posted strong returns in the third quarter, turning the tide on the year-to-date figures and bringing them back firmly into the positive. Continued quantitative easing in the US, Japan, and EU seemed to improve overall investor sentiment toward equities while also keeping fixed income yields at historical lows.
All major US asset classes logged positive performance in the 3rd quarter, with the broad market returning 6.23%. Asset class returns ranged from 4.84% for small growth stocks to 6.51% for large value stocks.
Across the size and style spectrum, large outperformed small while value bested growth.
International developed equities followed a story similar to that of the US, with all major asset classes posting positive returns for the quarter. At the country level, Greece led the way with a return of 21.05%.
Following the trend from the second quarter, the US dollar continued to appreciate against all major foreign currencies, boosting the returns of dollar denominated foreign investments.
Across the size and style spectrum, small beat large and value bested growth.
Emerging Markets Stocks
The broad market returned 7.74%, with all other major asset classes posting positive returns. Small cap led the way at 8.41% while value stocks finished last, slightly trailing at 7.19%. All emerging markets countries posted positive returns with the exception of Morocco at -3.75%.
The dollar appreciated against all of the main emerging markets currencies, positively affecting dollar-denominated returns of emerging markets equities by 1.83%.
The results of the size and style dimensions were mixed, with small beating large and growth besting value.
Select Country Performance
With confidence in equities appearing to rebound after previous concerns over the European debt crisis, all developed markets countries posted positive returns with the exception of Japan. Despite being the epicenter of the European debt crisis, Greece led the way with a quarterly return of 21.05%. Emerging markets told a similar story: all but one country posted positive returns.
Real Estate Investment Trusts (REITs)
International REITs outperformed US REITs
in the quarter, posting a positive return of 9.26% versus a 0.38% loss.
The negative return for US REITs marked only the 2nd negative quarter since 2010, while international REITs posted their 4th straight positive quarter.
Reversing the trend of the previous quarter, Commodities posted a positive return of 9.69%.
Leading the rise were silver and unleaded gas, with returns of 24.85% and 24.77%, respectively.
Lean hogs trailed all other commodities, posting a return of -11.29% for the quarter.
Global investor demand for high-quality paper continued in the third quarter, producing sustained low yields and high prices.
The relative safety of sovereign debt—and fixed income, in general—remains the preferred allocation for investors seeking
a high quality refuge. Absolute yields on sovereign debt have remained at or near historical lows and even at negative levels.
Over the quarter, credit risk was rewarded, driven by investor desire for incremental yield. US corporate spreads relative to Treasuries narrowed over the quarter by 43 basis points. Spread compression was largely driven by the lower rung of the investment grade universe.
These portfolios illustrate the performance of different global stock/bond mixes and highlight the benefits of diversification. Mixes with larger allocations to stocks are considered riskier but also have higher expected returns over time.
Knightmare on Wall Street
Which of the following statements applies to this summer’s stock market behavior?
A) Computer errors at a major trading firm generated millions of faulty trades, causing dramatic and puzzling price swings in dozens of stocks.
B) A New York Times columnist fumed that “Wall Street has
created its own Frankenstein.
The machines are now
C) The S&P 500 Index rose
13.51% for the year through
the end of August.
Answer: All of the above.
The July 31 trading session was marked by unusual activity in
148 stocks listed on the New York Stock Exchange, many of which swung sharply in the first hour of trading due to an apparent error in a newly installed software program developed by seventeen-year-old Knight Capital Group Inc., one of the country’s largest market-making and trading firms.
For some, the incident was an unwelcome reminder of the
so-called “flash crash” on May 6, 2010, which saw the Dow Jones Industrial Average plunge over 700 points in fifteen minutes.
Wall Street Journal columnist Jason Zweig sounded out a number of individual investors
for their thoughts on the market gyrations and got an earful. A
New York lawyer observed that the investors he talks to are convinced “the game is stacked against them” and that earning
a pittance in safe fixed income investments was preferable to “losing it all on a roulette-wheel stock market.”
Incidents such as the “flash crash” are often cited as a contributing factor to investor skepticism of equity investing. One can sympathize with investors who fear that the investment industry machinery somehow places them at a disadvantage, but we think such concerns should be placed
in a proper context. We live in
a complicated world, and it’s unrealistic to expect power plants, airliners, or stock exchanges to work perfectly 100% of the time. The lights go out, flights are canceled on short notice, and computers freeze up just when
we need to print that important document. These malfunctions serve to remind us that technology is a mixed blessing, but few of us would prefer a permanent return to the era of spinning wheels
Some of us are old enough to remember the commission schedule at NYSE-member firms in the days before negotiated commission rates and high-speed trading algorithms. A 100-share order of IBM or Procter & Gamble used to cost $80.73. These days, a customer with a meaningful checking account balance can execute one hundred trades a year for free. More traders and more trading paves the way to greater liquidity and lower transaction costs.
We do wonder how many investors were even aware of
the trading gyrations as they
were taking place. We suspect those expressing the greatest alarm were accustomed to watching market developments minute by minute.
In this regard, we cannot improve on Jason Zweig’s observation, so we’ll quote him directly: “It’s harder than ever for long-term investors to ignore the trading madness of Mr. Market. But ignoring it remains the very essence of what it means to be an investor.”