PMC Market Commentary: October 31, 2014

A Macro View – 2014 Market Pullback Reflections

The U.S. equity market rebounded significantly in recent weeks with the S&P 500 Index recouping almost all of the lost ground during the most recent market pullback started in mid-September. As of the close of business on October 30, 2014, the S&P 500 Index had a year-to-date total return of +9.7%, within just striking distance of its all-time high. As 2014 is winding down with the seasonally-strong months of November and December remaining, the S&P 500 Index is poised for a potential double-digit-gain for the year.

The U.S. equity market has been resilient in 2014, with the S&P 500 Index shaking off four major market pullbacks. At the beginning of the year, concerns about emerging markets (“emerging market scare”) caused the first market pullback in 2014; in April, worries about excessive valuation of social media and biotech stocks (“social media/biotech scare”) dragged the index down by nearly 5% in only a week; during late July and early August, concerns about a potential escalation of the conflict between Russia and Ukraine (“Russian/Ukraine scare”) rattled the market once again; last but certainly not least, the recent plunge due to global growth worries (“global growth scare”) caused the S&P 500 Index to tumble as much as 9.8%, just shy of the 10% mark generally considered as the threshold of market correction.

Figure 1

All market pullbacks in 2014 did not last long, though, ranging from 7 to 26 days. While the short duration of market pullbacks makes it easier for buy-and-holders to stick around, this type of quick-in-quick-out market downturns is difficult to time for tactical investors such as most hedge funds. The quick and sharp change in market directions is difficult even for the most nimble investors. For example, to successfully take advantage of the April “social media/biotech scare”, you have to be correct – not once, but twice – within a short seven-day span.

During these downturns, there was much talk among market pundits about the 10% correction mark. The suspicion is that the market has not had a 10%-plus pullback for a while and thus is due for one imminently. It is true that the last 10%-plus drawdown of the S&P 500 Index occurred as far back as April – June of 2012, but there is nothing magic about the 10% mark. The theory is that once the market drops 10% to reach the so-called correction territory, it will go down further and thus it is scary. Really? Look at what happened after the last 10%-plus fall, and you can conclude that this 10% anxiety is a bit far-fetched. After the S&P 500 Index experienced the 10% sell-off in 2012, it declined only 0.9% and then bounced back with a vengeance. The most-recent pullback (“the global growth scare”) was the severest since then with a peak-to-trough loss of 9.8%. If we have to worry about lack of market correction, this one is as good as it gets. Just because it is 0.2% shy of the 10% mark and thus “disqualifying” it as a legitimate market correction is not valid.

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.