Off to the Races
As we approach November 8th, I am repeatedly asked, “How will the outcome of the upcoming elections impact investment markets, and which is better for the stock market – Republican leaders or Democratic?” My honest, easy answer (or non-answer) is always – “it depends”. However, let’s see if any broad generalizations can be made based on historical observations.
All Time High
2017 is on pace to be one of the least volatile U.S. equity market environments in history. Any way you look at it, the S&P 500 has experienced one of the calmest periods ever recorded. The broad market benchmark has posted nine consecutive positive months to start 2017 – the S&P 500 has never experienced a calendar year without at least one negative month. Year-to-date, the largest drawdown by the S&P 500 has been 2.6%, extending the streak of consecutive trading days without a 3% market pullback to 226, second only to the 241 trading days in 1995/1996. Over the last year, monthly volatility for the S&P 500, as measured by standard deviation, has been 5.5%, a level comparable to bonds historically. Even intra-day movements have been muted as the daily swing between the market’s high for the day and low for the day averaged 0.4% in September, the lowest level recorded in the last forty years.
There are several factors that have contributed to this extended period of nearly uninterrupted prosperity, with the S&P 500 climbing higher in eighteen out of the last nineteen months: (1) Central bank policies, which have pushed yields down to historic lows around the world, supporting the relative attractiveness of equities over bonds; (2) An improving, albeit very slowly, global economy and robust corporate earnings growth; (3) The rise in popularity of passive investing, resulting in the indiscriminate buying of equities; and (4) A “buy the dip” investment mentality. Humans are natural pattern seekers and the recent pattern within equity markets has been every pullback just represents a short-term profit opportunity. As this pattern has continued, the dips have become shallower with investors moving faster to take advantage of what has recently seemed like a riskless profit opportunity.
But, we caution investors not to be lulled to sleep by the unprecedented period of tranquility. The Federal Reserve has been slowly removing its foot off the artificial stimulus accelerator, raising short-term interest rates and announcing plans to reduce the size of its balance sheet. Despite strong earnings growth, equity market valuations remain elevated and if the pattern of “buy the dip” breaks, the indiscriminate buying from passive investors could reverse, resulting in indiscriminate selling, putting significant pressure on equity markets. Finally, the political climate is toxic and the threat of a geopolitical event, the one source of market volatility in 2017, remains heightened. Nobody knows when markets will take a breather, and we certainly do not list these concerns as an indication of an impending market problem. However, understanding the potential headwinds markets could face will hopefully enable investors to be better prepared to defend against the recent siren song of low risk/high return equity investing.
Against this backdrop, a closer look at the third quarter capital market environment follows.
Equity Market Review
At the end of the third quarter, U.S. equity markets can be summarized simply – all-time high. Large cap benchmarks and small cap benchmarks, growth styles and values styles, nearly every broad U.S. equity index ended the third quarter at record levels. The S&P ended the quarter up 4.5%, bringing its year-to-date total return to 14.2%. Reviewing sector results, the Technology sector led the way, gaining 8.6% for the quarter. Investors continued to be attracted to the sector, driven by strong balance sheets, the potential for cash repatriation and a possible tailwind as corporate America reinvests in technology after an extended period of underinvestment. Outside of the Technology sector, Energy and Telecom, the two lagging sectors over the first half of the year, experienced solid gains, climbing 6.8%. Despite the strong quarter, both areas remain negative year-to-date. On the opposite end of the spectrum, the Consumer Staples sector was the only area that failed to gain ground during the third quarter.
Reviewing U.S. equity markets by capitalization and style, small cap stocks were the exception to the low volatility rule, falling 4% early in the period before rallying in excess of 10% over the final thirty trading days of the quarter. The dramatic rally resulted in smaller cap companies outpacing their larger cap counterparts for the quarter, but they continue to trail year-to-date. From a style perspective, growth benchmarks continued their relative dominance over value benchmarks across the capitalization spectrum, increasing their year-to-date lead into double digits.
Robust gains were not limited to the U.S. markets. Foreign equity markets sustained the momentum generated by improving economic growth and favorable currency conditions, generating a 5.5% quarterly return for the MSCI EAFE Index ($). The strong quarter has pulled the year-to-date return for the broad-based developed market index over 20%. Rising confidence, economic growth and corporate profits, combined to boost European ex UK markets sharply higher while Japanese equities benefited from an 18% year-over-year increase in exports.
Fixed Income Review
Expectations for another Federal Reserve rate hike in December climbed, pushing short-term yields higher. Longer-term yields fell early in the quarter, but climbed higher in September ending the period basically unchanged. The late quarter bond-market sell off was in response to the Fed’s announcement it would start reducing its balance sheet commencing in October. Outside of the Treasury sector, the “risk-on” environment across the globe continued to support spread sectors as credit outperformed similar duration government bonds. For the period, U.S. bonds, as measured by the Barclays U.S. Aggregate Bond Index increased 0.8%, bringing its year-to-date total to 3.1%, recovering all of the losses experienced during Q4-2016. Finally tax-exempt bonds benefited from strong supply/demand technicals as new issue supply has failed to keep pace with elevated demand.
Foreign equity markets continued to be the top performers as the global economic outlook gained momentum. Against this backdrop, emerging market equities and international small cap equities led the way during the quarter, gaining 8.0% and 7.0%, respectively. Finally, gold rallied after a difficult second quarter, gaining 3.1% to bring its year-to-date return in to double digits.
Smartphone/Tablet Theft 2nd Quarter 2016 Security
While you may not see the stories on major news networks, smartphone theft is big business and you would be surprised to learn that in 2013, 3.1 million smartphones were reported stolen in the United States. It may also come as a surprise that nationally, just under a third of all robberies involve a smartphone of some kind.
A stolen smartphone (or tablet) represents a win-win for the thief because they have your device and in many cases, they get the information inside that device. Identity theft (and fraud) often begins from within a stolen device. Remember that ID theft is merely the stealing of your information. ID fraud occurs when the would-be thief uses your information for financial gain (loans, lines of credit, using your credit card to purchase groceries or gas).
So, ask yourself, “What if my iPhone or iPad (or computer) was stolen? Would I know what to do? Could I track and erase the data on my device?” In answering these questions, the first suggestion would be to learn about your technology and any such capabilities. Knowledge of how you can protect, track and erase your device is an essential first step. Having this knowledge will give you confidence when creating a plan in case your device is lost or stolen. In this article, you will find two scenarios where having a plan is crucial.
- What to do when a personal device (computer/tablet/smartphone) has been stolen.
- What to do when someone has used my identity to make a purchase or secure a loan.
- Stolen card numbers are a more likely event and represent an easier mark for the thief. Stealing enough information about you to secure a loan is a different problem altogether.
Another suggestion would be to prepare yourself for a potentially daunting exercise in perseverance and patience. Living through either scenario is not going to be fun – but executing a well-prepared plan will make the experience much more manageable.
Scenario #1 – Your tablet/phone was lost or stolen while on vacation (or from any location). We will use an Apple product as an example.
Don’t panic – I say that because I assume you have already placed a passcode on the device. This is the FIRST line in the defense of your identity/privacy. If your iPad/iPhone or other tablet has no barrier between it and the general public – everything is fair game to the lucky thief.
Make a Call – If you suspect theft, notify the local authorities and try to retrace your steps in an effort to identify where the device went missing. Also, call your investment advisor, banker, CPA, etc to notify them of the potential theft. Many phishing emails originate from a client’s stolen device.
Track your device – Apple gives you the ability to locate your devices (iPads, Macs, iPhones) via the www.icloud.com. I encourage you to learn more about how Apple and Android help protect you and the information on your devices.
Change your passwords – Strongly consider changing any password associated with email located on your device. Other password changes could involve banking/credit card apps and shopping apps as well. Definitely change the account password for your AppleID (or Google Play if applicable).
Notify your banks and credit card companies – If you had your bank account(s) and credit card data integrated into your phone through their apps, notify them immediately and request that an alert be placed on your account. They may offer other helpful suggestions as well.
Scenario #2 – What to do when someone has used my identity to make a purchase or secure a loan.
There are fantastic resources that I would like for you to consider when thinking about your response to personal identity theft. The first link below is a more concise approach titled, “What To Do Right Away.” You might want to print this out and have it ready just in case…
The second link is “Taking Charge: What To Do When Your Identity is Stolen” and will help you build a personal recovery plan.
I encourage you to spend some time in these documents and work through them to build a greater awareness of where you have the most exposure.
Identity thieves and fraudsters gain the most from victims who are not prepared. A victim who has a plan, knows their technology and who to call can mitigate much of the risk that comes from a stolen device. Being able to quickly respond to these events will save you time, money and hopefully some sanity.
A premium is often placed on investing in financial markets, our careers and healthy lifestyles. While these are worthy endeavors, we live in a world that requires more diligence in protecting and caring for our privacy and identity. The former usually takes time to realize a return, if any. I believe the latter will most certainly benefit you not only in the short run, but in the long run as well.
Written by Jon Atchison Information Security Coordinator for Welch Hornsby, Inc.