Investment Review

Fall 2015

The third quarter of 2015 gave us many opportunities to add value for our clients. One of the biggest ways we were able to offer help was through tax loss harvesting. This strategy involves selling one holding, realizing a loss for tax purposes, and buying a similar position to retain market exposure. It’s a way to offset gains realized earlier this year or to stockpile losses for future years. Although the wash sale rule must be avoided to succeed with this strategy, capital losses in excess of capital gains can reduce other income by $3,000; any excess loss is carried forward for use in a future year.

Although it may appear counterintuitive, our clients benefited by staying invested during the volatility.

Below are some headlines that appeared during the third quarter.

• China Accelerates Efforts to Stem Selloff
• Iran, World Powers Reach Nuclear Deal
• U.S. and Cuba Set to Formally Reestablish Diplomatic Relations
• U.S. Oil Prices Fall to Six-Year Low
• Eurozone Economic Growth Slows
• U.S. 10-Year Note Closes Below 2%
• Consumers Take on More Debt, Signaling Confidence in Economy
• Janet Yellen Expects Interest Rate Increase This Year
• U.S. Second Quarter GDP Grows 3.9%
• Global Markets to Log Worst Quarter since 2011

 
We are not offering these headlines to explain market returns. But they do serve as a reminder that investors should view daily events from a long-term perspective and avoid making financial decisions based solely on the news.

 

Investment Review

Looking at broad market indices, the U.S. equity market outperformed both developed international and emerging markets during the third quarter. U.S. REITs recorded the highest returns, outperforming equity markets.

The value effect was negative in the U.S., developed international, and emerging markets. Small caps outperformed large caps in the non-U.S. and emerging markets but underperformed in the U.S. The dollar appreciated against most currencies.

Benchmark Funds	Q3 2015	12 Months Ending 9/30/2015
U.S. Large Cap Vanguard 500 Index Fund	-6.5%	-0.8%
U.S. Large Cap Value iShares Russell 1000 Value Index	-8.4%	-4.6%
U.S. Small Cap iShares Russell 2000 Index	-11.9%	+1.3%
U.S. Small Cap Value iShares Russell 2000 Value Index	-10.8%	-1.8%
International Vanguard Total International Stock Index Fund	-11.6%	-10.8%
Emerging Markets Vanguard FTSE Emerging Markets ETF	-17.9%	-18.3%
U.S. REITs Vanguard REIT ETF	+2.1%	+9.3%
Investment-Grade Bonds iShares Core Total U.S. Bond Market ETF	+1.3%	+2.9%

 
Individual Asset Classes

U.S. Stocks

The U.S. 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. U.S. stocks are 53% of the world’s market capitalization.

Developed International Stocks

Developed markets outside the U.S. underperformed the U.S. equity market but outperformed emerging markets indices in U.S. dollar terms. Small caps outperformed large caps. Value underperformed growth indices across all size ranges. International developed market stocks are 37% of the world’s market cap.

Emerging Markets Stocks

Emerging markets indices underperformed developed markets indices (including the U.S.) in U.S. dollar terms during the third quarter. Small cap indices outperformed large cap indices. Value underperformed growth indices across all size ranges. Emerging markets are 10% of the world’s market cap.

Real Estate Investment Trusts

U.S. REITs were one of the best-performing asset classes during the third quarter, outperforming equities. Although REITs outside the U.S. produced negative absolute returns, global REITs outside the U.S. outperformed broad market equity indices. There are 96 U.S. REITs and 242 REITs outside of the U.S.

Investment-Grade Bonds

Interest rates across the U.S. 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.

In Conclusion

Bonds will generally decrease the week-to-week volatility of an investment portfolio. Mixes with larger allocations to stocks are considered riskier but have higher expected returns over time. Regardless of your stock to bond mix, investors will benefit from a globally diversified portfolio. Read more about our investment philosophy.