In markets’ latest tumult, a lot of losers—and some surprising winners
Investing in financial markets in the third quarter was a lesson in humility: You lost money almost anywhere you turned.
That sets the tone for the final quarter of 2015. Do money managers and amateur investors alike take bigger risks to try to salvage their year — or do they shrink back to defensive mode?
Barring a strong rally, key measures of U.S. stock and bond markets are on track to end the year in the red. That would mark the first year since 1990 that simply holding cash beat both stocks and bonds, says Bank of America Merrill Lynch.
For better or worse, many investors follow trends either in jumping into markets or fleeing them. Here’s a look at recent trends in key markets:
U.S. stocks
In one sense, last quarter’s sell-off followed the traditional script: Blue-chip stocks held up better than small-company shares. That was a comfort to investors who expect big-name stock holdings to provide relative shelter.
The Russell 2000 small-stock index sank 12.2% in the quarter, while the blue-chip Standard & Poor’s 500 index fell 6.9%.
The worst damage was centered in shares of commodity producers, including energy companies, mining firms, metal producers and farm suppliers. The catalyst was a summer plunge in global natural-resources prices, led by oil, that was triggered by fears over China’s slowing economy. The average energy stock slid 18% in the three months. Shares of steel titan U.S. Steel dived 49%.
Jeffrey Saut, investment strategist at brokerage Raymond James, advises bargain hunters to move slowly: Many investors who still own stocks that are down sharply this year may sell by year-end to lock in losses for tax purposes, he notes. That could push prices even lower. “In a lot of cases in markets, the best strategy is the exercise of patience,” Saut said.
There also was plenty of damage last quarter in the market’s glamour sectors, including biotech. The average biotech stock plunged 18%, partly on perennial criticism of high drug prices.
In the restaurant sector, newly public Shake Shack Inc. soared as high as $96 in mid-May, then crashed to $47 by the end of September.
The quarter’s relative few big winners tended to be companies that surprised Wall Street with strong earnings growth. The short list included Netflix and Nike, whose shares rose 10% and 14%, respectively, in the three months. Given investors’ nervous mood, third-quarter earnings reports in the next few weeks could make or break many stocks.
Foreign stocks
Overseas markets mostly fared worse than U.S. stocks in the third quarter as worries deepened about slowing global economic growth. Of 46 foreign stock markets tracked by Standard & Poor’s, 38 fell more than the S&P 500 in the three months. American investors’ losses were compounded in countries where the dollar continued to rise, further devaluing local stocks when translated into dollars.
Even so, the surprise to many U.S. investors may be that for the year to date their holdings in Japan and Europe are performing better than U.S. stocks. Thanks to a massive rally early in the year, Japanese stock mutual funds owned by U.S. investors still are up 3.6% year-to-date, according to Morningstar Inc. And the Japanese government continues to pull out all the stops to try to boost the economy.
European stock funds owned by U.S. investors are down just 0.8% year-to-date. Some global investors have turned more optimistic about Europe now that it appears Greece will stay in the Eurozone.
By contrast, emerging-market stocks remain one of the worst-performing investment categories amid severe economic woes in Brazil and Russia, China’s slowdown and weak economies in many smaller countries. The average emerging-market fund owned by U.S. investors plunged 15.9% in the third quarter, and over the last five years has lost 3.5% a year. Even over the last 10 years U.S. investors have made practically nothing in emerging-market shares, as measured by the stock price of the popular iShares MSCI emerging-markets fund.
Some experts think it might finally be time to turn positive on developing markets. Jim Paulsen, chief investment strategist at Wells Capital Management in Minneapolis, believes prices of many commodities may be bottoming after sliding for most of the last five years. That would benefit emerging-market economies that are major commodity exporters. A turn in commodities would mean that “stock investors may want to increase foreign market allocations,” Paulsen said.
Mark Wilson, chief investment officer at advisory firm Tarbox Group in Newport Beach, also is looking to boost emerging-market holdings. For the stocks to revive, he said, emerging-market economies “don’t have to do great, just not as poorly as expected.”
Bonds
Many investors were again reminded last quarter why they own fixed-income securities: They’re typically a lot less volatile than stocks, and when markets are gripped by fears of economic trouble interest rates tend to fall, boosting the value of older bonds.
The average mutual fund that owns long-term corporate and government bonds gained 1.7% in the third quarter, counting interest earnings and price gain. In diversified portfolios that helped offset investors’ stock losses.
Tax-free municipal bonds were standouts as investors sought shelter. Every category of muni bond fund tracked by Morningstar had a positive return in the quarter.
But high-yield “junk” bonds were a key source of worry: The average junk fund lost 4.5% in the quarter, reflecting investors’ concern that a growing number of companies issuing junk securities will have trouble making debt payments. Many recent issuers of junk bonds are energy companies involved in the fracking boom now gone bust.
Billionaire investor Carl Icahn has for months been raising red flags about the risk of a crash in the junk bond market, a warning he repeated last week.
As for the bond market as a whole, investors need to remember: The big unknown remains what will happen to longer-term interest rates when the Federal Reserve finally raises its key short-term rate from near zero — a move the Fed put off in September but said is still on the near-term horizon. If rates jump on new bonds, older bonds will drop in value.
