The third quarter was hard on investment portfolios. The S&P 500 was the best of the major indices, down 6.4% for the quarter and 5.3% for the year. The Dow was down 7% for the quarter and year. In diversified portfolios the real damage came from overseas, especially China, down 23%. As well, Europe was off 9%, Japan 11% and our own small caps were down 11%. In domestic industry sectors energy and biotech were the worst, down nearly 18%. Bonds were a bit of a haven, up 1-2% for the quarter.
Third quarter earnings along with fourth quarter projections are being reported over the next few weeks and they will set the tone into the end of the year. Fortunately, earnings expectations have been reduced due to slowing in China and emerging markets, so the market’s reaction may be somewhat priced in, especially since our late August sell off.
The Big Fed Decision is still hanging over the market and we’re hoping it gets resolved in December to get it behind us, but another decision to postpone could be a Christmas gift to carry us into the New Year. In the meantime, prices have been reduced as the market attempts to adjust to the possibility of slower growth and somewhat higher interest rates.
With interest rates still very low and the potential for lower bond prices we still prefer blue chip dividend paying stocks balanced with shorter maturity investment grade bonds and money market. Price earnings multiples have come down on many large cap stocks and shorter bond maturities are much less volatile than longer maturities.
It’s not easy to hold tight in a declining market, and it doesn’t hurt to let a few stocks or stock funds go if one is especially worried or near retirement, but the U.S. financial system is greatly improved and our economy is holding up, so we don’t feel it is smart to get too defensive, even heading into a heightened political period.