The past month was a rough one for the markets. Last week the Dow Jones Industrial Average (DJIA) fell over 467 points which equates to about 2.75% while the Standard & Poor’s (S&P) 500 fell 2.69%. The S&P 500 is now about 3.15% off from the high set earlier this year. When you look into the other sectors of the markets, you can see everything was down last week and there was nowhere to hide as far as stocks were concerned.
AN UNFORGIVING MONTH FOR STOCKS
If we are to look at the U.S. market as a whole, the chart above from Bespoke shows that 33% of all stocks in the Russell 3000 are down 10% or more over the past month. The Russell 3000 comprises 99% of the market capitalization of all stocks traded in the U.S.
Last year everyone wanted to own the Dow and the S&P 500. Owning a diversified portfolio with REITS, commodities, MLPs and other inflation hedges was not very popular. This year, many portfolios would be flat or down without them.
If you look at the following chart, we have been increasing our exposure in emerging market bonds, MLPs, BDCs, bank loans, tax free bonds, high yield bonds and REITs over the last few months. Most all of these types of investments are outperforming equities year to date and all pay relatively strong rates of interest.
Some analysts are telling us that Janet Yellen and her crew could be looking at raising the fed funds rate as early as the first quarter of next year. Others feel that rates could stay low for the next few years.
Very few fixed income investments will not be affected by a bond panic. These panics happen much less frequently than stock selloffs, however. Whereas stocks can and do lose 10% to 30% or more when they suffer, the Barclays Bond Aggregate lost a little over 2% last year (which was the worst year for bonds since 1994).
We see another bond panic like we saw last year as relatively unlikely although the mechanisms that allowed the selloff to extend as far as it did do not seem to have been rectified. Institutional investors are much less involved in the bond markets today and less likely to provide ballast in the event of a panic. They are not looking to purchase bonds for their inventories. Rates are lower and capital requirements are much more stringent these days.
Because of this, there is more opportunity for investors to find fixed income investments at good prices if they see a selloff as an opportunity rather than something to be fearful of.
Data as of August 4th, 2014