FWIW: A market perspective client letter from a fund manager I deal with:
As you are aware the past three months have been very difficult for stocks. Given the current environment, we thought it would be helpful for us to share some of our thoughts on these recent market developments.
In early to mid-August, we were reminded that stock market corrections can occur quickly. Global markets retraced most or all of the year-to-date gains and volatility increased significantly. Then September came and although many of the underlying market currents didn’t change, the headline indices regained some of that lost ground. A small group of large stocks (Amazon, Google, Netflix, Facebook, and Chipotle Mexican Grill, to name a few) which have outsized effects on the indices, drove a significant portion of the recovery. Unfortunately, in order to match or exceed this type of index performance, an investor would have to make a few, highly concentrated bets. Our preference remains on running well-diversified portfolios, which are not rewarded in these types of environments.
Many studies on the historical and current divergence between growth and value oriented investing arrive at a similar end point: value-based investing has historically produced superior returns. But we are currently in a period in which markets have flocked toward growth. As the accompanying graphic shows, the year-to-date performance (through Sept. 24, 2015) of several Russell® indices reinforces the current situation. Consistently, across market capitalizations, the growth category returns are essentially flat while the general (core) returns are negative and the value category returns are more negative, still.
Not surprisingly, uncertainty remains the only certainty at this time. Market participants continue to weigh the potential effects of an eventual decision by the Federal Reserve to raise the benchmark interest rate, the collapse of commodity prices, global economic health and market valuations. Third quarter earnings, a key component of the past six year bull market, are expected to be less robust than last year. Currently, it appears that this is a temporary issue, but is one that warrants close attention. Ultimately, we expect these higher levels of market volatility to remain in the near to intermediate term. Importantly, it is in this market environment in which stock picking is rewarded.
Believers in mean reversion, like us, expect the environment to eventually return to normal. More important is that we maintain our value discipline. We have been through these type of markets before. In the short term, they are painful, but in the long term our clients have been well served by staying the course.
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