A Tough Third Quarter for Markets
OCTOBER: This is one of the peculiarly dangerous months to speculate in stocks in. The others are July, January, September, April, November, May, March, June, December, August, and February. – Mark Twain
The above quote reminds us that there is inherent risk in investing and in exchange for that risk, we are over time rewarded for our patience. The third quarter of 2015 proved to be a tough one for the markets and brought with it heightened volatility last seen back in 2011. According to the Wall Street Journal, the S&P 500 closed down 6.9% this quarter and the tech heavy Nasdaq dropped 7.4%. While investors are girding for more volatility in the coming months it is important to remember that patience and a long term plan is the way to overcome periods of volatility like this. Remember, 2011 was just as volatile and the market has moved higher since then.
Fears of a slowing Chinese economy prompted a pullback in equity prices in the late summer months of 2015. This move into correction territory was brief as stocks recovered somewhat in September. Still, other economic concerns, like lower commodity prices and lower earnings expectations prove to be an albatross for the markets, at least for the time being. According to The Wall Street Journal, analysts estimate that the earnings for the S&P 500 will be down 4.5% for the quarter driven by a 65% decrease in earnings from the energy sector which has been pummeled by lower oil prices. All is not lost however, according to Thompson/Reuters, if you strip out the energy sector, S&P500 earnings are expected to grow 3.4% last quarter. So, we need to be patient as the market reprices itself and that may take a while. At times like these, we recommend focusing on investing in value oriented investments. We see opportunity in undervalued investments with lower than expected returns. Since these types of investments work on average, meaning as their earnings tend to surprise to the upside and “revert” to their mean earnings over time. This mean reversion over time equates to an opportunity for patient investors to earn some degree of alpha (excess return).
This October is not the first October that I have introduced Mark Twain’s famous quote in my newsletter and I am quite certain it won’t be my last. Volatility is a normal part of investing in the markets and corrections like we experienced in the last quarter are a normal part of a bull market like we are currently in with the American economy still growing at a 2%+ clip for the year.
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