Markets Around the World Stage a Late Summer Retreat

September 2, 2015

Broken_CrystalBallAugust was the worst month for the market in years. Everyone knew stocks were overdue for a 10% correction, but this one was fast and furious. It took markets down at least 10% from their latest peak.

But it could have been worse: most U.S. markets were barely negative year to date through August 31, 2015, and foreign markets, with the notable exception of emerging markets, were slightly positive.

We don’t expect this is the start of a bear market, but that is always a possibility. And if we plan to be long-term investors, we should expect to eventually face a bear market. Major declines, like the one we endured in 2008-2009, have historically been very rare, but declines of 15-25% happen more regularly, usually once or twice per decade. Nobody likes being invested in corrections, crashes, and especially bear market declines. Yet those who sell out of their long-term investments in down markets often fail to participate in the subsequent recoveries.

What’s Working

The sell-off affected nearly every area of the market. Just five of the hundreds of funds and ETFs we track in NoLoad FundX had positive returns in August. But some areas lost less than others. U.S. markets held up better than most foreign markets, and, within the U.S., value lost less than growth, particularly small- and mid-cap value.

Growth funds remain highly ranked in NoLoad FundX this month, however, boosted by their stronger returns over the last 3, 6, and 12 months. A few diversified value funds made it up the ranks as well as some small-cap funds. We continue to hold U.S. large-cap funds, and this month, we sold our last foreign position.  

Every sector except gold had losses in August, but over the last year, gold has been negative while healthcare and biotech have been strongly positive. Health care funds remain in our growth portfolios, but we take small positions in these more concentrated funds.

Fixed Income

Bonds were also down in August, but relative to stocks they were certainly a safer haven. Even intermediate governments were negative, and short-term funds lost about a quarter of percent. Diversified intermediates shed half a percent and high yields lost more (down about 1.5%), but both are still well ahead of short-term bonds, as well as the Barclays Aggregate Index year to date.

We hold a diversified mix of bond funds, including conservative higher-quality bond funds as well as some exposure to higher-yielding funds that offer considerably more upside potential than short-term or government bonds.

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