Volatility Resurfaces; Bond Legend Moves On

in Market Commentary by

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.

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.

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Craig Birk, CFP®

Craig Birk, CFP®

Craig Birk is a member of the Personal Capital Advisors Investment Committee. He also serves as Vice President of Portfolio Management. Prior to Personal Capital Advisors, he was an integral leader within the portfolio management team at Fisher Investments. During Craig’s time there, the company increased assets under management from $1.5 billion under management to over $40 billion. His responsibilities included risk management, portfolio implementation oversight, and management of all securities and capital markets research analysts. Mr. Birk graduated from the University of California at San Diego and has earned the Certified Financial Planner® designation.

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