Financial Synergies | Q3 2015 Market Review

Financial Synergies | Q3 2015 Market Review

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  Q3Quarterly Market Review ThirdQuarter 2015
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  Quarterly Market Review ThirdQuarter 2015 Overview: Market Summary World Stock Market Performance World Asset Classes US Stocks International Developed Stocks Emerging Markets Stocks Select Country Performance Real Estate Investment Trusts (REITs) Commodities Fixed Income Global Diversification Quarterly Topic: Should Investors Sell after a “Correction”? This report features world capital market performance and a timeline of events for the past quarter. It begins with a global overview, then features the returns of stock and bond asset classes in the US and international markets. The report also illustrates the performance of globally diversified portfolios and features a quarterly topic.
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  US Stock Market Global Real Estate International Developed Stocks USBond Market Global Bond Market ex US -7.25% -10.57% -0.54% +1.23% Emerging Markets Stocks BONDSSTOCKS -17.90% Market Summary 3 Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Market segment (index representation) as follows: US Stock Market (Russell 3000 Index), International Developed Stocks (MSCI World ex USA Index [net div.]), Emerging Markets (MSCI Emerging Markets Index [net div.]), Global Real Estate (S&P Global REIT Index), US Bond Market (Barclays US Aggregate Bond Index), and Global Bond ex US Market (Citigroup WGBI ex USA 1−30 Years [Hedged to USD]). The S&P data are provided by Standard & Poor's Index Services Group. Russell data © Russell Investment Group 1995–2015, all rights reserved. MSCI data © MSCI 2015, all rights reserved. Barclays data provided by Barclays Bank PLC. Citigroup bond indices © 2014 by Citigroup. Third Quarter 2015 Index Returns +2.01%
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  World Stock MarketPerformance 4 Graph Source: MSCI ACWI Index. MSCI data © MSCI 2015, all rights reserved. It is not possible to invest directly in an index. Performance does not reflect the expenses associated with management of an actual portfolio. Past performance is not a guarantee of future results. MSCI All Country World Index with selected headlines from Q3 2015 These headlines are not offered to explain market returns. Instead, they serve as a reminder that investors should view daily events from a long-term perspective and avoid making investment decisions based solely on the news. 140 160 180 200 220 Jul Aug Sep “China Accelerates Efforts to Stem Selloff” “Iran, World Powers Reach Nuclear Deal” “US and Cuba Set to Formally Reestablish Diplomatic Relations” “Existing Home Sales Surge, Prices Hit Record” “US Economy Picks Up, but Stays in Its Rut” “US Oil Prices Fall to Six-Year Low” “Eurozone Economic Growth Slows” “US Consumer Prices Rise for Sixth Straight Month” “US 10-Year Note Closes Below 2%” “Consumers Take on More Debt, Signaling Confidence in Economy” “Janet Yellen Expects Interest Rate Increase This Year” “US Second Quarter GDP Grows 3.9%” “Russia Begins Air Strikes in Syria” “Global Markets to Log Worst Quarter since 2011”
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  World Asset Classes 5 Pastperformance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. The S&P data is provided by Standard & Poor's Index Services Group. Russell data © Russell Investment Group 1995–2015, all rights reserved. MSCI data © MSCI 2015, all rights reserved. Dow Jones data (formerly Dow Jones Wilshire) provided by Dow Jones Indexes. Barclays data provided by Barclays Bank PLC. Looking at broad market indices, the US equity market outperformed both developed ex US and emerging markets during the third quarter. US REITs recorded the highest returns, outperforming equity markets. The value effect was negative in the US, developed ex US, and emerging markets. Small caps outperformed large caps in the non-US and emerging markets but underperformed in the US. The US dollar appreciated against most currencies. Third Quarter 2015 Index Returns 3.09 1.23 0.00 -4.29 -6.44 -8.03 -8.39 -10.57 -10.73 -11.92 -12.05 -16.67 -17.90 -19.15 Dow Jones US Select REIT Index Barclays US Aggregate Bond Index One-Month US Treasury Bills S&P Global ex US REIT Index (net div.) S&P 500 Index MSCI World ex USA Small Cap Index (net div.) Russell 1000 Value Index MSCI World ex USA Index (net div.) Russell 2000 Value Index Russell 2000 Index MSCI World ex USA Value Index (net div.) MSCI Emerging Markets Small Cap Index (net div.) MSCI Emerging Markets Index (net div.) MSCI Emerging Markets Value Index (net div.)
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  -5.29 -6.44 -7.25 -8.39 -10.73 -11.92 -13.06 Large Cap Growth LargeCap Marketwide Large Cap Value Small Cap Value Small Cap Small Cap Growth Ranked Returns for the Quarter (%) US Stocks 6 Third Quarter 2015 Index Returns Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Market segment (index representation) as follows: Marketwide (Russell 3000 Index), Large Cap (S&P 500 Index), Large Cap Value (Russell 1000 Value Index), Large Cap Growth (Russell 1000 Growth Index), Small Cap (Russell 2000 Index), Small Cap Value (Russell 2000 Value Index), and Small Cap Growth (Russell 2000 Growth Index). World Market Cap represented by Russell 3000 Index, MSCI World ex USA IMI Index, and MSCI Emerging Markets IMI Index. Russell 3000 Index is used as the proxy for the US market. Russell data © Russell Investment Group 1995–2015, all rights reserved. The S&P data are provided by Standard & Poor's Index Services Group. The US equity market recorded negative performance for the third quarter. Small caps underperformed large caps. Value stocks underperformed growth stocks among marketwide indices. However, in small caps, the effect was reversed with small cap value outperforming small cap growth. 53%US Market $21.0 trillion World Market Capitalization—US Period Returns (%) * Annualized Asset Class YTD 1 Year 3 Years** 5 Years** 10 Years** Marketwide -5.45 -0.05 12.53 13.28 6.92 Large Cap -5.29 -0.61 12.40 13.34 6.80 Large Cap Value -8.96 -4.42 11.59 12.29 5.71 Large Cap Growth -1.54 3.17 13.61 14.47 8.09 Small Cap -7.73 1.25 11.02 11.73 6.55 Small Cap Value -10.06 -1.60 9.18 10.17 5.35 Small Cap Growth -5.47 4.04 12.85 13.26 7.67
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  International Developed Stocks 7 ThirdQuarter 2015 Index Returns Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Market segment (index representation) as follows: Large Cap (MSCI World ex USA Index), Small Cap (MSCI World ex USA Small Cap Index), Value (MSCI World ex USA Value Index), and Growth (MSCI World ex USA Growth). All index returns are net of withholding tax on dividends. World Market Cap represented by Russell 3000 Index, MSCI World ex USA IMI Index, and MSCI Emerging Markets IMI Index. MSCI World ex USA IMI Index used as the proxy for the International Developed market. MSCI data © MSCI 2015, all rights reserved. Developed markets outside the US underperformed the US equity market but outperformed emerging markets indices in US dollar terms. Small caps outperformed large caps. Value underperformed growth indices across all size ranges. -12.05 -10.57 -9.11 -8.03 -10.40 -8.89 -7.41 -6.46 Value Large Cap Growth Small Cap Ranked Returns (%) Local currency US currency 37%International Developed Market $14.7 trillion World Market Capitalization—International Developed * Annualized Asset Class YTD 1 Year 3 Years** 5 Years** 10 Years** Large Cap -6.69 -10.14 4.60 3.42 2.92 Small Cap -0.34 -3.71 7.48 5.74 4.23 Value -9.65 -14.32 3.56 2.61 2.12 Growth -3.75 -5.88 5.59 4.18 3.65 Period Returns (%)
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  Emerging Markets Stocks 8 ThirdQuarter 2015 Index Returns Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Market segment (index representation) as follows: Large Cap (MSCI Emerging Markets Index), Small Cap (MSCI Emerging Markets Small Cap Index), Value (MSCI Emerging Markets Value Index), and Growth (MSCI Emerging Markets Growth Index). All index returns are net of withholding tax on dividends. World Market Cap represented by Russell 3000 Index, MSCI World ex USA IMI Index, and MSCI Emerging Markets IMI Index. MSCI Emerging Markets IMI Index used as the proxy for the emerging market portion of the market. MSCI data © MSCI 2015, all rights reserved. Emerging markets indices underperformed developed markets indices (including the US) in US dollar terms during the third quarter. Small cap indices outperformed large cap indices. Value underperformed growth indices across all size ranges. -11.74 -10.76 -12.10 -13.47 -16.67 -16.69 -17.90 -19.15 Small Growth Large Cap Value Ranked Returns (%) Local currency US currency 10%Emerging Markets $3.8 trillion World Market Capitalization—Emerging Markets * Annualized Asset Class YTD 1 Year 3 Years** 5 Years** 10 Years** Large Cap -15.48 -19.28 -5.27 -3.58 4.27 Small Cap -9.80 -15.23 -1.09 -2.43 6.72 Value -17.38 -22.70 -7.66 -5.09 4.12 Growth -13.63 -15.89 -2.95 -2.12 4.35 Period Returns (%)
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  -3.10 -5.51 -5.96 -6.81 -9.62 -10.14 -11.40 -11.45 -11.90 -13.44 -14.83 -15.28 -16.59 -17.08 -18.01 -18.45 -19.95 -21.26 -23.28 -23.76 -24.88 -26.20 -33.66 Hungary Czech Republic India Qatar Poland UAE Philippines Mexico Korea Chile Russia Egypt Taiwan Thailand Malaysia South Africa Turkey Peru China Colombia Indonesia Greece Brazil RankedEmerging Markets Returns (%) -1.12 -1.86 -4.17 -5.43 -6.30 -6.36 -6.60 -6.97 -7.12 -7.25 -7.38 -7.46 -8.77 -9.31 -9.58 -9.97 -11.06 -11.24 -14.92 -14.98 -16.54 -16.93 -18.79 Ireland Denmark Italy Israel France Finland Austria Switzerland Sweden US Belgium New Zealand Netherlands Portugal UK Germany Japan Spain Canada Australia Norway Hong Kong Singapore Ranked Developed Markets Returns (%) Select Country Performance 9 Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Country performance based on respective indices in the MSCI World ex US IMI Index (for developed markets), Russell 3000 Index (for US), and MSCI Emerging Markets IMI Index. All returns in USD and net of withholding tax on dividends. MSCI data © MSCI 2015, all rights reserved. Russell data © Russell Investment Group 1995–2015, all rights reserved. UAE and Qatar have been reclassified as emerging markets by MSCI, effective May 2014. Ireland again recorded the highest country performance in developed markets and Singapore and Hong Kong the lowest for the third quarter. In emerging markets, Hungary and the Czech Republic posted the highest returns, while China’s equity performance dominated news headlines as its market recorded one of the lowest country returns. Third Quarter 2015 Index Returns
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  Real Estate InvestmentTrusts (REITs) 10 Third Quarter 2015 Index Returns Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Number of REIT stocks and total value based on the two indices. All index returns are net of withholding tax on dividends. Total value of REIT stocks represented by Dow Jones US Select REIT Index and the S&P Global ex US REIT Index. Dow Jones US Select REIT Index used as proxy for the US market, and S&P Global ex US REIT Index used as proxy for the World ex US market. Dow Jones US Select REIT Index data provided by Dow Jones ©. S&P Global ex US REIT Index data provided by Standard and Poor’s Index Services Group © 2014. US REITs were one of the best-performing asset classes during the third quarter, outperforming equities. Although REITs outside the US produced negative absolute returns, global REITs outside the US outperformed broad market equity indices. 59%US $565 billion 96 REITs 41%World ex US $565 billion 243 REITs (22 other countries) Total Value of REIT Stocks -4.29 3.09 Global REITs (ex US) US REITs Ranked Returns (%) Period Returns (%) * Annualized Asset Class YTD 1 Year 3 Years** 5 Years** 10 Years** US REITs -2.84 11.82 9.92 12.31 6.69 Global REITs (ex US) -5.30 -2.47 4.53 6.64 3.11
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  Commodities 11 Third Quarter 2015Index Returns Past performance is not a guarantee of future results. Index is not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. All index returns are net of withholding tax on dividends. Securities and commodities data provided by Bloomberg. Commodities were broadly negative during the third quarter. The Bloomberg Commodity Index Total Return fell 14.47%. The energy complex led the decline with WTI crude oil dropping 27.39% and natural gas shedding 15.03%. Grains also posted negative returns; Chicago wheat lost 17.54%, while soybeans dropped 14%. Livestock was mixed with lean hogs up 13.42% and live cattle falling 14.59%. Asset Class YTD Q3 1 Year 3 Years** 5 Years** 10 Years** Commodities -15.80 -14.47 -25.99 -16.02 -8.89 -5.67 Period Returns (%) * Annualized -27.39 -26.30 -20.51 -19.77 -19.75 -17.54 -16.02 -15.03 -14.59 -14.00 -13.47 -11.00 -10.76 -10.74 -10.52 -8.31 -7.13 -5.02 -4.40 13.42 WTI Crude Oil Brent Oil Heating Oil Unleaded Gas Soybean Oil Wheat Zinc Natural Gas Live Cattle Soybean Nickel Cotton Corn Copper Coffee Aluminum Silver Gold Sugar Lean Hogs Ranked Returns for Individual Commodities (%)
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  2.04 3.71 2.65 3.55 10-Year US Treasury State and Local Municipals AAA-AA Corporates A-BBB Corporates BondYields across Issuers Fixed Income 12 Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Yield curve data from Federal Reserve. State and local bonds are from the Bond Buyer Index, general obligation, 20 years to maturity, mixed quality. AAA-AA Corporates represent the Bank of America Merrill Lynch US Corporates, AA-AAA rated. A-BBB Corporates represent the Bank of America Merrill Lynch US Corporates, BBB-A rated. Barclays data provided by Barclays Bank PLC. US long-term bonds, bills, inflation, and fixed income factor data © Stocks, Bonds, Bills, and Inflation (SBBI) Yearbook™, Ibbotson Associates, Chicago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield). Citigroup bond indices © 2014 by Citigroup. The BofA Merrill Lynch Indices are used with permission; © 2014 Merrill Lynch, Pierce, Fenner & Smith Incorporated; all rights reserved. Merrill Lynch, Pierce, Fenner & Smith Incorporated is a wholly owned subsidiary of Bank of America Corporation. Third Quarter 2015 Index Returns Interest rates across the US fixed income markets generally decreased during the third quarter. The yield on the 5-year Treasury note dropped 25 basis points to end the period at 1.38%. The yield on the 10-year Treasury note decreased 27 basis points to end the quarter at 2.06%. The 30-year Treasury bond fell 22 basis points to finish with a yield of 2.88%. Yields on the short end of the curve were relatively unchanged. Short-term corporate bonds returned 0.30%, while intermediate-term corporate bonds returned 0.71%. Short-term municipal bonds returned 0.74%, while intermediate- term municipal bonds returned 1.68%. Municipal general obligation and revenue bonds experienced similar returns. Period Returns (%) Asset Class YTD 1 Year 3 Years** 5 Years** 10 Years** BofA Merrill Lynch Three-Month US Treasury Bill Index 0.02 0.02 0.06 0.08 1.33 BofA Merrill Lynch 1-Year US Treasury Note Index 0.32 0.25 0.27 0.33 1.88 Citigroup WGBI 1−5 Years (hedged to USD) 1.09 1.57 1.34 1.50 2.97 Barclays Long US Government Bond Index 0.22 8.62 2.78 6.18 6.92 Barclays US Aggregate Bond Index 1.13 2.94 1.71 3.10 4.64 Barclays US Corporate High Yield Index -2.45 -3.43 3.51 6.15 7.25 Barclays Municipal Bond Index 1.77 3.16 2.88 4.14 4.64 Barclays US TIPS Index -0.80 -0.83 -1.83 2.55 4.02 * Annualized -1 0 1 2 3 4 US Treasury Yield Curve 1 Yr 5 Yr 10 Yr 30 Yr 9/30/15 9/30/14 6/30/15
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  $0 $10,000 $20,000 $30,000 $40,000 $50,000 $60,000 $70,000 $80,000 $90,000 12/1988 12/1993 12/199812/2003 12/2008 12/2013 Growth of Wealth: The Relationship between Risk and Return Stock/Bond Mix Global Diversification 13 Third Quarter 2015 Index Returns Diversification does not eliminate the risk of market loss. Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect expenses associated with the management of an actual portfolio. Asset allocations and the hypothetical index portfolio returns are for illustrative purposes only and do not represent actual performance. Global Stocks represented by MSCI All Country World Index (gross div.) and Treasury Bills represented by US One-Month Treasury Bills. Globally diversified allocations rebalanced monthly, no withdrawals. Data © MSCI 2015, all rights reserved. Treasury bills © Stocks, Bonds, Bills, and Inflation Yearbook™, Ibbotson Associates, Chicago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield). These portfolios illustrate the performance of different global stock/bond mixes and highlight the benefits of diversification. Mixes with larger allocations to stocks are considered riskier but have higher expected returns over time. -9.34 -7.03 -4.71 -2.36 0.00 100% Stocks 75/25 50/50 25/75 100% Treasury Bills Ranked Returns (%) Asset Class YTD 1 Year 3 Years** 5 Years** 10 Years** 100% Stocks -6.65 -6.16 7.52 7.39 5.14 75/25 -4.93 -4.55 5.69 5.67 4.12 50/50 -3.24 -2.98 3.82 3.85 2.92 25/75 -1.60 -1.47 1.93 1.96 1.54 100% Treasury Bills 0.00 0.00 0.00 0.00 0.01 * AnnualizedPeriod Returns (%) 9/2015 100% Stocks 75/25 50/50 25/75 100% Treasury Bills
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  Stock prices inmarkets around the world fluctuated dramatically for the week ended August 27. On Monday, August 24, the Dow Jones Industrial Average fell 1,089 points— a larger loss than the “Flash Crash” in May 2010—before rallying to close down 588. Prices fell further on Tuesday before recovering sharply on Wednesday, Thursday, and Friday. Although the S&P 500 and Dow Jones Industrial Average rose 0.9% and 1.1%, respectively, for the week, many investors found the dramatic day-to-day fluctuations unsettling. Based on closing prices, the S&P 500 Index declined 12.35% from its record high of 2130.82 on May 21 through August 24. Financial professionals generally describe any decline of 10% or more from a previous peak as a “correction,” although it is unclear what investors should do with this information. Should they seek to protect themselves from further declines by selling, or should they consider it an opportunity to purchase stocks at more favorable prices? Based on S&P 500 data, stock prices have declined 10% or more on 28 occasions between January 1926 and June 2015. Obviously, every decline of 20% or 30% or 40% began with a decline of 10%. As a result, some investors believe that avoiding large losses can be accomplished easily by eliminating equity exposure entirely once the 10% threshold has been breached. Market timing is a seductive strategy. If we could sell stocks prior to a substantial decline and hold cash instead, our long-run returns could be exponentially higher. But successful market timing is a two-step process: determining when to sell stocks and when to buy them back. Avoiding short-term losses runs the risk of avoiding even larger long-term gains. Regardless of whether stock prices have advanced 10% or declined 10% from a previous level, they always reflect (1) the collective assessment of the future by millions of market participants and (2) the expectation that equities in both the US and markets around the world have positive expected returns. Our research shows that US stocks have typically delivered above-average returns over one, three, and five years following consecutive negative return days resulting in a 10% or more decline. Results from non-US markets are similar. Contrary to the beliefs of some investors, dramatic changes in security prices are not a sign that the financial system is broken but rather what we would expect to see if markets are working properly. The world is an uncertain place. The role of securities markets is to reflect new developments—both positive and negative— in security prices as quickly as possible. Investors who accept dramatic price fluctuations as a characteristic of liquid markets may have a distinct advantage over those who are easily frightened or confused by day-to-day events and may be more likely to achieve long-run investing success. References “Wild Ride Leaves Investors Grasping,” Wall Street Journal, August 25, 2015. “Investors Scramble as Stocks Swing,” Wall Street Journal, August 25, 2015. Should Investors Sell After a "Correction"? 14 Adapted from “Should Investors Sell After a Correction?” by Weston Wellington, Down to the Wire column, September 2015. Dimensional Fund Advisors LP ("Dimensional") is an investment advisor registered with the Securities and Exchange Commission. Diversification does not eliminate the risk of market loss. There is no guarantee investment strategies will be successful. Past performance is no guarantee of future results. All expressions of opinion are subject to change without notice in reaction to shifting market conditions. This content is provided for informational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services. Third Quarter 2015