PMC Market Commentary: November 14, 2014
After intense selling and volatility in equities in early October, stocks have staged a substantial rally. Since the lows of October 15, the S&P 500 had rallied more than 12% through late this week, recovering all the ground lost in early October and then some. Earnings season has added additional fuel to the rally, as the companies of the S&P 500 posted overall earnings of more than 7.5%, with decent revenue growth of more than 4%. Bonds meanwhile also regained ground after having seen yields plunge in October, and yields now stand about where they were a month ago.
The intense swings of October were sharp and sudden, and dissipated almost as quickly as they arrived. It was a healthy reminder that volatility is always a possibility. It also can erupt unexpectedly, with few apparent triggers, and then evaporate just as quickly.
That said, we are back to steady gains, low volumes, and a market that continues to confound professional investors by stubbornly refusing to go up and down nearly as much as many traders and hedge funds expect. One recent research piece was aptly titled “The Bull Market No One Loves,” and indeed, it is difficult to find much conviction in this multi-year run among the Wall Street cognoscenti.
What’s past is prologue, so what matters now is what happens next. We will soon be flooded with a tsunami of 2015 market commentary (which we may offer ourselves – be warned). All of it will be useful only insofar as it cogently analyzes current trends and developments, and any who set precise return numbers are best dismissed unless it is clearly with the caveat that the numbers are meant only as a representation of conviction rather than some precious crystal ball that only that person possesses.
Here is what we know: we know, as The Envestnet Edge recently underscored, that the two years following a midterm election in the United States have for the past fifty years or more been very strong for domestic U.S. equities. We know that emerging markets, international markets, and small cap stocks have all continued to underperform this year, even though the fundamentals underlying each of those appear to be stronger than the returns generated. Expectations that those asset classes would soon do better have been disappointed, but if those fundamentals remain decent, those expectations will not continue to be disappointed. We know also that in spite of multiple geopolitical issues and structural concerns, it requires a concerted effort to make the case that we are on the precipice of a major downturn. It is possible, always possible, but not probable.
Finally, given current trading volumes (low), we may be in for a relatively quiet year-end. As we said earlier in the year, quiet periods are not a given and should be used well to position. Much easier to do that when things are calm, which they are now and most surely will not always be.
The information, analysis, and opinions expressed herein are for general and educational purposes only. Nothing contained in this weekly review is intended to constitute legal, tax, accounting, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. All investments carry a certain risk, and there is no assurance that an investment will provide positive performance over any period of time. An investor may experience loss of principal. Investment decisions should always be made based on the investor’s specific financial needs and objectives, goals, time horizon, and risk tolerance. The asset classes and/or investment strategies described may not be suitable for all investors and investors should consult with an investment advisor to determine the appropriate investment strategy. Past performance is not indicative of future results.
Information obtained from third party sources are believed to be reliable but not guaranteed. Envestnet|PMC™ makes no representation regarding the accuracy or completeness of information provided herein. All opinions and views constitute our judgments as of the date of writing and are subject to change at any time without notice.
Investments in smaller companies carry greater risk than is customarily associated with larger companies for various reasons such as volatility of earnings and prospects, higher failure rates, and limited markets, product lines or financial resources. Investing overseas involves special risks, including the volatility of currency exchange rates and, in some cases, limited geographic focus, political and economic instability, and relatively illiquid markets. Income (bond) securities are subject to interest rate risk, which is the risk that debt securities in a portfolio will decline in value because of increases in market interest rates. Exchange Traded Funds (ETFs) are subject to risks similar to those of stocks, such as market risk. Investing in ETFs may bear indirect fees and expenses charged by ETFs in addition to its direct fees and expenses, as well as indirectly bearing the principal risks of those ETFs. ETFs may trade at a discount to their net asset value and are subject to the market fluctuations of their underlying investments. Investing in commodities can be volatile and can suffer from periods of prolonged decline in value and may not be suitable for all investors. Index Performance is presented for illustrative purposes only and does not represent the performance of any specific investment product or portfolio. An investment cannot be made directly into an index.
Alternative Investments may have complex terms and features that are not easily understood and are not suitable for all investors. You should conduct your own due diligence to ensure you understand the features of the product before investing. Alternative investment strategies may employ a variety of hedging techniques and non-traditional instruments such as inverse and leveraged products. Certain hedging techniques include matched combinations that neutralize or offset individual risks such as merger arbitrage, long/short equity, convertible bond arbitrage and fixed-income arbitrage. Leveraged products are those that employ financial derivatives and debt to try to achieve a multiple (for example two or three times) of the return or inverse return of a stated index or benchmark over the course of a single day. Inverse products utilize short selling, derivatives trading, and other leveraged investment techniques, such as futures trading to achieve their objectives, mainly to track the inverse of their benchmarks. As with all investments, there is no assurance that any investment strategies will achieve their objectives or protect against losses.
Neither Envestnet, Envestnet|PMC™ nor its representatives render tax, accounting or legal advice. Any tax statements contained herein are not intended or written to be used, and cannot be used, for the purpose of avoiding U.S. federal, state, or local tax penalties. Taxpayers should always seek advice based on their own particular circumstances from an independent tax advisor.
© 2014 Envestnet. All rights reserved.