3rd Quarter 2017 Market Commentary

Stocks continued to climb higher during the third quarter, with international and emerging market stocks increasing their lead on U.S. markets. S&P 500 earnings rose to an all-time high of $30.51 per share for the second quarter. International and emerging markets continued to soar, assisted by a declining U.S. dollar, low valuations, and strong earnings. Large cap stocks performed better than small caps, and growth stocks outperformed value stocks. Technology was the highest performing sector in the S&P 500, and was up 27.4% for the year. On the flip side, energy and telecom stocks have posted negative returns this year. Bonds posted small positive returns as short-term interest rates ticked higher. International and emerging market bonds outperformed U.S. bonds.

*US Stocks represented by the S&P 500 Index, International Stocks represented by the MSCI EAFE Index, and Emerging Markets represented by the MSCI Emerging Markets Index

Where is Volatility? Read more

1st Quarter 2016 Market Commentary

If I simply told you that US Large Cap stocks were up 1.35% and bonds were up 3.03% in the first quarter of 2016, I’d be leaving out a large part of the story. In between January 1 and March 31, stocks declined as much as 10% in early February, only to reclaim the entire loss and post a small positive return by quarter end. That’s a rocky ride, even compared to historical market moves. International developed stocks fared worse, the MSCI EAFE Index was down -3.01% for the quarter. Emerging market stocks finally shined, with the index up 5.71%. Commodities posted a slight positive return, up 0.42%. Global REITS had strong performance, up 7.22% in the first quarter of the year.

While Americans watched our new favorite reality show “The 2016 Presidential Election,” there were several fascinating and important stories developing for investors around the world.

Negative Interest Rates in Japan

On January 29, the Bank of Japan (BOJ) announced a negative interest rate policy. The Japanese equivalent of the Fed Funds rate is now -0.1%.[1] This negative policy rate is effectively a penalty on banks that do not lend aggressively since banks have to pay interest on excess reserves. The BOJ is now the second major central bank to adopt a negative interest rate policy. The European Central Bank (ECB) has been negative since mid 2014. Other countries with negative policy rates include Switzerland, Sweden and Denmark.

The BOJ’s announcement was a shock to market participants, sending Japanese stocks higher and the Yen lower against the US Dollar. Previously, Bank Governor Haruhiko Kuroda stated that Japan would not adopt negative interest rates. Currently 60% of global government bonds are paying less than 1%, with almost 30% paying less than zero. [2] It remains to be seen whether these extreme and unconventional central bank policies will have a positive or negative effect on their home economies.

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3rd Quarter 2015 Market Commentary


A wave of downward volatility greeted global investors during the third quarter of 2015. Many markets were down more than 10% from recent highs. This is often called a market “correction” by the media. Emerging market stocks took the worst of the hit. The MSCI Emerging Markets Index lost -17.90% during the quarter that ended September 30. Year to date, the emerging markets index is down -15.48%. International developed stocks gave back gains posted in the first half of the year. The MSCI EAFE Index was down -10.23% for the quarter and is -5.28% for the year. US Stock fared better than international stocks and were down -6.44% during the quarter. Commodities lost -14.47% during the quarter and are down -15.80% year to date. Global real estate also suffered losses, and the S&P Global REIT Index is down -4.36% year to date. Investors rushed to bonds for safety, pushing interest rates lower yet again. The Barclays Aggregate Bond Index is up 1.13% for the year.

Here is a word of caution before I continue discussing recent negative performance. Long-term investors should avoid making changes to their portfolio based on short-term market movements. The volatility we’ve seen this summer is neither extraordinary nor outside the norm. The S&P 500 Index declines on average -14.2% in a calendar year. [1]  The most recent pullback of -12.7% (from the highest point to the recent low) is less than that 35-year average. The rest of this letter is an explanation of what happened during the quarter and not a prediction. In ThirtyNorth’s conference room in New Orleans, there is a real crystal ball. It serves as a constant, tongue-in-cheek, reminder that no one can predict the future.

1,000 Point Drop

On Monday, August 24th, the Dow Jones Industrial Average opened down over 1,000 points. The index bounced back and ended the day off 588 points. “Dow Drops 1,000 Points” is an exciting and fear-provoking headline. Remember that 1,000 points on a base of 16,500 is 6.1%. Five years ago, the Dow Jones was at a level of 10,000, and a drop of 1,000 points would have been a 10% decline. Why do we have such difficulty interpreting a 1,000-point drop? Many financial headlines made comparisons to “Black Monday”, the day in 1987 when the Dow Jones dropped and closed down 22.6%. Can you guess how many points the Dow dropped on that day? Read more

4th Quarter 2014 Market Commentary

Global market performance in 2014 was a mixed bag of results. US stocks were up, and large cap stocks outperformed small caps. The S&P 500 Index returned 13.69% for the year while the Russell 2000 Index (US small cap stocks) returned 4.89%. International and emerging market stock returns were negative for the year, punished by a rising US dollar. The MSCI EAFE Index was down -4.90%, and the MSCI Emerging Market Index was down -2.19%. To the surprise of everyone, US interest rates continued their decline in 2014. Bonds, measured by the Barclays Aggregate Index, were up 5.97% for the year. Declining interest rates boosted global real estate performance, and the S&P Global REIT Index was up 21.54%. Oil’s dramatic decline caused the Bloomberg Commodity Index to fall -17.01%.


Oil prices took a dramatic plunge, which began in late July and was exacerbated by OPEC’s (Organization of Petroleum Exporting Countries) November decision not to cut production. WTI (West Texas Intermediate) Crude began the year at $93.11/barrel, peaked in late June at $107.95/barrel, and fell to $53.45/barrel by year-end.[1] That is a 50% decline in six months! As of this writing, the price has fallen below $50/barrel.

While there are many speculative theories about the price decline, the reason may be as simple as a mismatch of supply and demand. Global production of petroleum products is currently higher than global demand. The current gap between production and consumption is roughly 500,000 barrels per day.[2]

U.S. crude oil production has increased from 5.4 million barrels per day (MMbpd) in January 2010 to 9.0MMpbd in October 2014, an increase of 66%.[3] While the drop in gasoline prices is welcomed by consumers at the pump, current prices will likely cause a slow down in capital spending on new oil production projects in the US. It’s important to remember there are both winners and losers in a lower oil price environment. Oil importing countries such as the US, Japan, China, and western Europe benefit from lower prices. Exporting countries are the losers, including Russia, Venezuela, Nigeria, Iran, and the Persian Gulf states. Oil prices will likely find equilibrium over the next two years as producers slow investment in new projects and older wells experience production declines or go offline. Oil importing countries may see a boost in demand as lower prices help their economic growth. Read more

3rd Quarter 2014 Market Commentary

For the first time in almost three years, global financial markets cooled during the third quarter, particularly during the month of September. US large cap stocks, measured by the S&P 500 Index, lost -1.4% in September, but year to date are up 8.34%. A broader measure of the US stock market, the Russell 3000 Index lost -2.08% in September and is up 6.95% for the year. International stocks, hurt by strength of the US dollar, have returned -1.38% year to date. The MSCI Emerging Market index was down -7.41% in September but remains positive for the year at 2.43%. Interest rates increased slightly in September, causing the US Aggregate Bond Index to lose -0.68% for the month. Bonds are up 4.10% year to date. Global real estate continues to shine; the S&P Global REIT Index is up 10.81% through the third quarter. Commodities took the largest hit for the quarter and are now down -5.59% for the year.

Practically all of the news on the US economy was positive during the quarter. The third revision for second quarter Gross Domestic Product (GDP) showed that the economy increased at an annual rate of 4.6%. This follows a decrease of 2.1% during the first quarter of 2014. [1] The September jobs report showed that employment rosters increased by 248,000 for the month, and that the unemployment rate dropped to 5.9%. On average, the US has created 213,000 jobs per month over the past year.[2] The Federal Reserve Bank’s long-term estimate of full employment is 5.4%, which means we are just 0.5% from normal levels of employment.[3] US household net worth reached another all-time high of $81.5 Trillion in the second quarter.[4] More than five years into the current economic recovery, might we finally be ready to believe it?

Dollar Strength

Strength in the US economy signals a likely impending increase in interest rates, causing the US dollar to surge during the third quarter. The US Dollar Index, which measures the dollar against a basket of major global currencies, soared nearly 8% between June and late September. Read more

2nd Quarter 2014 Market Commentary

Global financial market movement in 2014 could be described in four words: slow and steady rise.  All areas of the market posted healthy, positive returns for the year through June 30, 2014. US Stocks, measured by the S&P 500 Index, were up 7.14%. Both International (4.78%) and Emerging Market stocks (6.14%) are also up year to date. Despite the Federal Reserve’s tapering of bond purchases, known as Quantitative Easing (QE3), interest rates surprisingly declined in the first half of the year. The Barclays US Aggregate Bond Index returned 3.93% through the end of June.  Alternative investments, such as global real estate and commodities, also posted positive returns.

In addition to strong returns, markets experienced near record low levels of volatility during the quarter. The CBOE Volatility Index (VIX), a key measure of market expectations of near-term volatility, averaged 13.34 in April and May, well below the historical average of 20, and dropped as low as 11.40 on May 30. As a point of reference, the VIX peaked above 80 in the height of the 2008-2009 financial crisis, 6x the current levels of volatility![1] The VIX index data begins in January 1990, which is nearly 25 years of data, a relatively short time period for investment analysis.  Remember that volatility is both a measure of up movements and down movements. Perhaps investors are neither greedy nor fearful at the moment, but rather, complacent. Read more

1st Quarter 2014 Market Commentary

Financial markets greeted the New Year with increased volatility. Global stock markets retreated in January, rebounded strongly in February, and declined again in March.  By quarter end, US Stocks were up 1.81% (S&P 500 Index), developed international stocks were up a modest 0.66% (MSCI EAFE Index), and emerging market stocks, showing continued weakness, were down -0.43% (MSCI Emerging Markets Index).  Fixed income investors caught a breather from negative price pressure, as bonds returned 1.84% (Barclays Aggregate Bond Index) for the quarter.  Alternative investments demonstrated their value in a diversified portfolio. Global real estate was up 7.03% (S&P Global REIT Index), and commodities snapped a lengthy losing streak, returning 6.99% (DJ-UBS Commodity Index) year to date.

During the quarter, the current bull market for US stocks turned 5 years old. For those who love useless data facts, it is now the 5th longest bull market for US stocks since the Civil War. [1] The S&P 500 Index has returned 179% since its March 9, 2009 intra-day low of 666, and is 7% shy of tripling in value.[2]  However, current levels are only 21% above the previous high in October 2007. Television pundits and Wall Street sell-side analysts are ever so eager to call the top of the market and predict the next down turn. While we do not attempt to make such predictions, we have a difficult time finding legitimate reasons for a major stock market decline in the near-term. Bear markets are caused by the existence of one or more of these four factors – economic recessions, restrictive monetary policy, excessive valuations, and exogenous shocks. Read more

4th Quarter 2013 Market Commentary

The US stock market pleasantly surprised everyone in 2013.  The S&P 500 Index experienced a record year. International stocks also had strong year, although emerging market stocks were down and trailed global stock markets significantly. Interest rates rose in 2013, causing negative returns for the bond market. Emerging market bonds, following a strong 2012, fell further than domestic bonds. Alternative investments were a mixed bag.  Global real estate was up slightly, while commodities were down due to weakness in gold, agriculture, and industrial metals. Of course calendar years are arbitrary measures for long-term investors who do not buy in on January 1st and sell on December 31st, but they do serve as convenient time periods for reflection and review of market performance.

Human nature dictates that we gravitate towards that gleaming return of the S&P 500 Index last year. We are tempted to measure our success against this number. How quickly we forget the reason we choose diversification in the first place! Remember the discussion about not “putting all of your eggs in one basket”? Let’s assume you were invested in a portfolio comprised only of the S&P 500 Index, and compare it to two hypothetical portfolios; a properly diversified 60/40 (moderate risk) portfolio and an aggressive portfolio of global stocks. We will compare an investment of $100,000 on January 1, 1995; one portfolio contains only the S&P 500 Index, one is globally diversified portfolio with 60% in global stocks and 40% in bonds, and the third is a globally diversified portfolio with 100% in stocks.[1] Read more