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Market Drops Following Global Concerns

Market Digest – Week Ending 10/17

A rally Friday ended a volatile week which saw the S&P 500 finish 1.0% lower. In a trend reversal, International stocks and Small Cap stocks held up better, with Small Cap posting gains. Earnings season moved into high-gear, but it was broad cash flows and perhaps Ebola headlines which moved markets. Wild swings Wednesday were likely the result of hedge funds being forced to reallocate as volatility increases. US Treasury yields hit their lowest levels in over a year as investors sought safety. German Bund yields hit all-time lows. Oil briefly dropped below $80 per barrel.

Weekly Returns:

S&P 500: 1,887 (-1.0%)
FTSE All-World ex-US: (+0.3%)
US 10 Year Treasury Yield: 2.20% (-0.09%)
Gold: $1,239 (+1.3%)
USD/EUR: $1.276 (+1.1%)

Major Events:                 

  • Monday – A nurse caring for the first Ebola patient in the US tested positive for the virus.
  • Monday – Islamic State captured much of the eastern and southern parts of Turkish border city Kobani, raising concerns the US’s air campaign will not be effective.
  • Tuesday – The World Health Organization said as many as 10,000 new cases of Ebola could be reported weekly in West Africa by December.
  • Tuesday – Ireland moved to close a tax loophole that encouraged many companies to reincorporate there.
  • Tuesday – Intel reported stronger than expected earnings and said demand for PC chips exceeded expectations.
  • Wednesday – Stocks endured wild swings, with the S&P 500 down more than 3% at one point before recovering to finish down around 1%
  • Wednesday – Netflix reported lower than expected subscriber growth. Shares dropped ~20%.
  • Thursday – US jobless claims unexpectedly fell to a 14-month low, signaling the labor market continues to strengthen
  • Friday – Mortgage giants Fannie Mae and Freddie Mac were reported to be close to an agreement with their regulator to be able to expand mortgage credit to those with lower credit scores and lower down payments
  • Friday – ECB officials said the bank would begin asset purchases within the next few days and a Bank of England official said rates could stay “lower, longer”.

Our take:

The market had some wild swings this week, but it was difficult to pin down the reason. Ebola fears spooked some, but after Monday when a Texas health worker tested positive, there really wasn’t any “good” or “bad” Ebola news.

To us, the biggest concern this week was seeing interest yields between the stronger and weaker European economies widen. Yields in Germany, France and Britain dropped, while yields in Italy, Portugal and (especially) Greece rose. If this trend accelerates, we will return to headlines of countries leaving the Euro, which could cause banks there to slow lending to an economy that is already on the brink of recession.

I said it last week, but I’ll say it again: Recent volatility is no reason to panic, but if you’ve been ignoring your asset allocation while markets were calm, it’s time to make sure there is a strategic plan.

If you’re looking for ways to add diversification but are turned off by Treasury Yields, consider a modest allocation to TIPS. People are worried more about deflation than inflation right now and sentiment is awful on TIPS. As a result, the cost of the inflation “insurance” is pretty low – TIPS are pricing in a long-term inflation expectation of just 1.5%. TIPS are an important part of our diversified portfolios. So far this year, we’d have been better off just owning Treasuries. But if you care about maintaining your lifestyle in retirement, TIPS make a lot of sense. And they may be cheap now.

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