So a bit of a taste of reality when the artificial stimulus is pulled away (no new European Bank Stimulus) and with a hint of the repercussions of what may follow if the US Federal Reserve raises interest rates when the FOMC meets in a week and a bit.
Pull away the thin layer of sugar coating of low interest rates and a real world full of uncertainties is revealed:
1) The global economy continues to struggle and is at risk (there is a high and rising risk of a US recession).
2) Global debt levels are at record levels.
3) Central banks have spent their "bullets" and need to keep a few in reserve for any unexpected "shocks".
4) The world "order" may be tested if and when there is a new US president.
5) North Korea has nuclear weapon capability and a "madman" at the helm.
Uncertainty = Volatility
And The CBOE Volatility Index (VIX) spiked by 40%.
The CNN Money Fear And Greed Index moved back to "Fear" territory (only a month ago it was in "Extreme Greed").
The S&P 500 lost close to 2.5% yesterday (on above average volume):
There wasn't the usual "safety" of bond markets (yesterday) as they sold off as well.:
Last Tuesday we reported on our weekly client webinar that our benchmark (which we measure our performance against) 60% equity / 40% fixed income (fully invested) combination had produced a total return of 6.34% (less fees and costs of approx. $.80 = 5.54%) so far this year and our client portfolio comparison was 6.33% (after fees and costs) over the same period.
As of Yesterday, that same benchmark is only returning 4.30%, 3.50% after fees and costs thus far this year. That is a big swing (close to 2%) and a lot of volatility.
(Source Bloomberg Total Return Analysis, Daily: Dec 31, 2105 to Sep 9, 2016 for ACWI /XBB)
Meanwhile our client who began with us in January, who's return this year to date had been 6.33% as of last Tuesday, is now at 5.69% (after fees and costs) as of the close of business yesterday, significantly less volatility.
As I have been rambling on and on for some time now, we have taken a very cautious approach to investing: choosing (often to the less than favourable views of our critics) to be less invested (than normally might be the plan) in equities (especially the very over-valued US equity market).
Hopefully, the reality of the impact on fully-invested portfolios is clear from yesterday's example. If that is OK for you. "Keep Calm And Carry On" (as they say).
However, if you prefer to sleep better at night, there is a way to get reasonable (perhaps better) risk-adjusted returns (less risk, same or better return) and that is through the use of a more tactical approach to investing (rather than the always fully invested 60 /40 model).
Our clients sleep better at night.
Feedback (from those not sleeping, or anyone else for that matter...)
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Scott Tomenson,CIM Managing Partner, Chief Investment Strategist