Daily Capital

Volatility Resurfaces; Bond Legend Moves On

Market Digest – Week Ending 9/26

Stock market volatility, in hibernation for most of the year, popped its head up for a look around this week. Despite a rally Friday, the S&P 500 finished down 1.4% for the week. The biggest decline came on Thursday (-1.6%). International stocks and small cap stocks each declined roughly 2.5%. US Q2 GDP was revised up to a healthy 4.6%. Investors were disappointed that China did not signal intention to increase stimulus to maintain its historically high growth rate. The Euro continued to decline against the dollar and is now given up nearly 7% in the third quarter.

The Tool To Beat

Weekly Returns:

S&P 500: 1,983 (-1.4%)
FTSE All-World ex-US: (-2.4%)
US 10 Year Treasury Yield: 2.53% (-0.10%)
Gold: $1,218 (+0.0%)
USD/EUR: $1.268 (-1.2%)

Major Events:    

  • Monday – The Rockefellers Brothers Fund announced it will reduce its exposure to coal and tar sands to less than 1% by year end and plans to divest from fossil fuel exposure entirely.
  • Monday – Apple announced it sold over 10 million iPhone 6s in its opening weekend.
  • Tuesday – The US said it conducted its first airstrikes in Syria on Islamic State and al Qaeda linked Khorosan.
  • Tuesday – Health Care stocks dropped as the US outlined plans to limit “inversion” mergers designed to lower tax rates, which had been favored largely by Pharmaceutical companies.
  • Wednesday – The SEC announced it is investigating if PIMCO artificially boosted returns of its bond ETF by mispricing securities.
  • Wednesday – Sales of new US homes surged 18%, exceeding estimates.
  • Friday – Legendary bond investor Bill Gross announced he was leaving PIMCO to work at Janus.

Our take:

Bill Gross has an incredible long term track record as an active bond manager. If you peel back the curtain, you’ll find that much of it is due to utilizing modest leverage during a 30 year secular bull market in bonds. It was a risk, but whatever it was, it worked, and he should get the credit.

But we live in a “what have you done for me lately” world, and Gross’ reputation and legacy appear to be on the ropes. Spurred by the departure of PIMCO’s #2 Mohamed El-Erian earlier this year, much has come out about Gross’s abrasive manner in the workplace. But no one cares about that when performance is good. The problem is the flagship PIMCO Total Return Fund has lagged most peers for the last couple of years.

The lag has been pretty modest in absolute terms, so I’m not that critical of it, but it is interesting how hard it is to stay on top as an active investment manager. Peter Lynch was smart – he had a few good years early, then stayed very close to benchmarks, and retired on top. Bill Miller is a poster child for the problems of active management. After beating the S&P 500 for 15 straight years, he lagged so badly in 2008 it devastated his long term returns (and many investors’ portfolios). John Paulson was a hero in the last bear market, but is now known largely for losing so much money betting on gold.

And these guys are very good. You can imagine what plays out millions of times within individual investor’s portfolios. Investing is a cumulative game. You can rapidly undo many years of good results with a few mistakes. It is very hard to go 30 years without making any, especially with the emotions that come from with being responsible for your own money.

At Personal Capital, we take a highly diversified, primarily passive, long-term approach and stick to it. Even that can feel wrong when large cap US stocks are the best performing asset class and investor darlings like Apple and Alibaba are grabbing headlines. But it prevents big mistakes over time. And that’s the key.

We wish Mr. Gross success at Janus – he’s 70 and has spent decades managing hundreds of billions of dollars. He will stay a billionaire either way, but how he does in the next few years will determine his legacy in the investment world.

The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. You should consult a qualified legal or tax professional regarding your specific situation. Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.

Any reference to the advisory services refers to Personal Capital Advisors Corporation, a subsidiary of Personal Capital. Personal Capital Advisors Corporation is an investment adviser registered with the Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training nor does it imply endorsement by the SEC.

Craig Birk, CFP®
Craig Birk leads the Personal Capital Advisors Investment Committee and serves as Chief Investment Officer. His focus is translating improvements in technology into better financial lives. Craig has been widely quoted in the Wall Street Journal, Bloomberg, CNN Money, the Washington Post and elsewhere. Prior to Personal Capital Advisors, he was a leader within the portfolio management team at Fisher Investments, helping assets under management grow from $1.5 billion to over $40 billion. Craig graduated from the University of California at San Diego and has earned the Certified Financial Planner® designation.

You can take control of your money. We’re here to help.

Sign up for our Newsletter to get tips from our financial experts.

Must be a valid email address
Icon Close

To learn what personal information Personal Capital collects, please see our privacy policy for details.