Third Quarter Market Review

“Wealth consists not in having great possessions, but in having few wants.”                  Epictetus

After ten consecutive quarters of positive total returns for the S&P 500, the US stock market in third quarter shocked investors who had grown accustomed to gains and a lack of volatility. Large company U.S. stocks lost 6.5%, small company U.S. stocks were off 12%, international developed market stocks tumbled 10%, and emerging markets stocks declined almost 18%.

The sudden volatility feels dramatic, but corrections like this are very normal. For perspective, since the start of 1980, the S&P has experienced 11 unique declines greater than 10% (the typical definition of a correction). Four evolved into full bear markets (declines over 20%) and seven did not. What happened in the third quarter has all the makings of a classic correction. It came more or less out of nowhere, and declines were steep and quick. Roughly two-thirds of corrections fade away quickly. While we can never know the near-term direction of the markets, we do know that the costliest mistakes come from emotional decisions to abandon a well-designed long-term investment strategy. As always, investors must assume risk to capture the long-term benefits of stock ownership.

Greece reached an agreement to stay in the Eurozone for at least a few more years, but it did not solve underlying structural problems. Major global markets no longer seem highly concerned with Greece. The market’s attention seems to have shifted focus to worrying about economic weakness in China and the follow-on impacts on commodity export centered countries like Brazil and Nigeria.

During the quarter, global bond markets provided some ballast to the declining equity markets. The Federal Reserve kept short-term interest rates close to zero at its highly anticipated September meeting, but the market reacted negatively. This may encourage the Fed to initiate “liftoff” in the fourth quarter. The most likely scenario is measured and paced increases, which should largely be priced into the financial markets.

Important Note: These materials are provided for informational purposes only.  Please do not assume that any information contained in this Insight serves as the receipt of, or as a substitute for, personalized investment advice from Madison.