October 2014 Market Update
Happy Halloween! This October the phrases “market correction” and “the return of volatility” seem to be haunting most investors. This month, we’ll look at what’s happened, what’s ahead, and how your portfolio has fared throughout it all.
Stock markets in Canada closed October slightly down and in the US the S&P 500 reached an all time high. However, earlier this month, stock markets in Canada and the US, saw drawdowns that were in correction territory (defined as a negative market movement of 10% or more). On October 15, the S&P/TSX Composite Index dropped below 14,000 which represented a 11.4% decline from its 2014 high at the beginning of September. Wednesday, following the Federal Reserve’s official statement bond yields rose to a 3 week high, following on from a sudden decrease two weeks ago. In addition, both crude oil and gold reached their 2014 lows this month. Equity declines were complemented by the VIX reaching its 2014 high on October 15. (The VIX is an index which measures the implied volatility of the S&P500.)
In recent weeks, two macro themes have been dominating the markets; Fed policy and slowdown in the global economy. On Wednesday, as the markets expected, the Fed announced the end of its bond buy back program, also called Quantitative Easing. The Fed also spoke positively about the US economy, which may lead to an interest rate hike earlier than expected. Global economies, in particular China and Europe, are showing signs of a slowdown. In Europe, the German government slashed its growth forecast for this year and next, deepening worries that Germany could slip into recession. Other themes which we are monitoring are the decline in energy prices and the ebola epidemic. The fall in oil prices, caused by the imbalance between supply and demand has been the driver for the weak performance of the Canadian stock market. How countries choose to deal with the ebola crisis could have future implications on global trade. So far we have already seen one country shut its borders to ‘ebola-affected’ African countries.
Our portfolios are diversified across equities, fixed income, real estate, commodities and alternatives. The asset classes in the portfolios were carefully selected and weighted to reduce correlation between each other to minimize short-term volatility. October was representative of how a well diversified portfolio limits volatility and reduces negative returns. At the beginning of the month we saw that as equities moved lower, bond prices moved higher. However, when the equity prices bounced back, bond prices held steady. After Wednesday’s announcement when bond prices fell equity markets were flat. Gold prices increased during market sell off and decreasing yield environment, but fell when equities stabilized and yields bounced back. As the market volatility increased so did the value of the options sold, which generates cash flow for our alternative asset class. Finally, listed real estate increased this month while generating ongoing cash flow reducing overall portfolio volatility.