September Market Update - Volatility Awakens by Jack Moller

The sleepy month of August was immediately followed by some big market swings in September.  As often happens, however, the “market” sold off sharply to start the month and then eventually recovered to close virtually unchanged.  This movement of the S&P 500 back to about even, however, belied some bigger shifts under the surface.  As we head into the last quarter of this presidential election year, we would not at all be surprised to see volatility increase further.  Adding to the mix, the markets might begin to anticipate the Fed more aggressively raising rates once the election is behind us.  It could indeed be a very interesting quarter for the markets.  We shall see.

”Safe” Investments Give Ground

As we have mentioned, we have been in an unusual situation over recent months where both “risk-on” and “risk-off” investments have done relatively well simultaneously.  In other words, investors have been rewarded with decent returns even when moving to perceived safety, particularly in bonds and gold.  Yet, inevitably, the prices of these “safe havens” rose to levels where they were not that safe anymore and lost momentum after their big rallies earlier in the year. 

U.S. Stocks Tread Water while Overseas Markets (and natural resources) Continue to Recover

The beaten up non-U.S. markets are continuing to show some life with nice gains, particularly in Asia and small-cap international companies.  Last month was also a very good one for the natural resource equities as the markets perceived glimmers of hope that OPEC might get together and coordinate production cuts.  Time will tell of course, and hopefully our pump prices don’t rise too much!

Last month, I included a chart showing various returns in different markets.  Unfortunately, the chart may have been confusing.  In a nutshell, here are the points I wanted to make:

• U.S. large companies have enjoyed an extraordinarily strong run since the March 2009 lows with only a couple minor corrections.  The index remains very close to its all-time highs.  These companies cannot any longer be considered cheap.
• Virtually all international markets experienced subsequent bear markets since 2009 and remain well off their highs.  Arguably, many non-U.S. markets are much cheaper and represent better value than their U.S. counterparts, though their seeming cheapness may simply be representative of worse fundamentals.
• Natural resource company stocks were decimated by the crash in oil prices and also may represent attractive value as the price of oil has stabilized.

The upshot is that while diversification has not appeared to be helpful recently with so many markets struggling, the tide will eventually turn and it may be happening now where we will again be happy to have our investments spread out in diversified portfolios.