In the period July 1, 2015 to September 30, 2015, the S&P500 lost 6.9%. The index closed the quarter at 1,920, almost the same place it was in May 2014. Market turmoil led investors to move out of almost all asset classes. Nervous investors preferred bonds to stocks. Out of Municipal bonds, Taxable bonds, US stocks and International stocks, Municipal bonds were the best performing, rising 1.3% in the quarter. Taxable bonds fared next best with a -1.4% return. US stock funds, on average, declined 7.9% and the average International fund dropped 10%. Large-cap stocks outperformed mid-caps and small-caps. The best performing sector within the stock market was real estate. The worst was energy. Healthcare, which normally is a defensive place to be, performed poorly falling almost 14% in the quarter led down by the selling of biotech stocks. An observation with healthcare is that the Fidelity biotech fund was down almost 20% in the quarter which means that traditional healthcare like pharmaceuticals, were thrown out with biotech. Companies like big pharmaceuticals could be a buy.

In a time dominated by index and ETF investing, there can be opportunities if you dig through the detail. The quarter, with its August 24th min-crash, showed investors that more than ever indexers, ETFs and high-frequency traders are driving the broader markets. As a stock-picker and follower of the principles of value investing, I know I have a bias against indexing. But, I believe that the combination of index investing, ETFs and high-frequency trading brings out the worst in momentum investing. It can create a snowball that can move prices lower in a hurry without any consideration to the underlying fundamentals of individual stocks or the general market. We are in a world of quick, powerful moves. A strategy to take advantage of this needs to be developed. I don’t have it figured out but it seems that a combination of looking for stocks that have been unfairly trampled (the aforementioned healthcare example), keeping cash on-hand to buy the fierce drops, and a commitment to patience and a long-term view are the only ways to navigate the volatility that can appear.

Regardless of the poor performance and the downward pressures on the market, stocks did manage to re-group and bounce as the 3rd quarter ended. Last week was a strong one for stocks, which surprised many pundits. At the end of the quarter, pessimism was high, as evidenced by mutual fund outflows and the voices talking “bear market”. Maybe the bounce will prove to be short-lived, the result of an over-pessimistic market that was over-sold. Time will tell.

I’ll caution the bears that this bull market has weathered a lot and to underestimate it has been a bad trade. – Ian Green