After a reasonably strong start to the year, equity markets reversed sharply in the third quarter due to a variety of factors, including uncertainty surrounding Federal Reserve policy, worries about the health of the U.S. economy, a continued collapse in commodities prices and concerns about an economic slowdown in China.
What will the rest of the year bring?
With three months to go in the trading year, we remain very optimistic. We anticipate equity markets (particularly emerging markets and sectors that have lagged) to rebound from these levels. We have already experienced positive market performance thus far in October, and we expect that to continue.
What should you do with your money now?
- Stay the course. It can be very tempting to adjust your investment approach when markets experience negative performance. Market volatility is very discomforting, but history shows patience and diversification are the keys to long-term goal achievement. Stay invested. Trust in your plan. Focus forward.
- Stay global. Emerging markets have sold off indiscriminately, largely due to commodity weakness and ongoing U.S. dollar strength. However, recent price movements do not change the fact that international markets represent a material share of global GDP and certain of these markets have significant upside potential as their middle classes continue to develop and their economies improve. Further, the U.S. trade balance is beginning to weaken (as U.S. exporters struggle due to the strong U.S. dollar), which is a benefit to international competitors.
- Maintain alternative investments. The recent downturn has reaffirmed the benefit of having alternative investments within portfolios. These investments are designed to have returns that are less correlated to equity and fixed income markets and thereby provide important protection during downturns like the one we just experienced. There are many available alternative investments, each of which is differentiated by its “contents” (underlying investments) and “container” (legal structure). Adding these investments to a traditional portfolio has the potential to enhance returns, while also reducing risk.
