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Quarterly Market Review: Q3 2018

October 31, 2018

 

Goodbye, October (The Month of Halloween and Scary Markets)

 

October is a great month in the Pacific Northwest with changing seasons, colorful trees, and of course, Halloween. It is also known for “October effect” – the theory that the stock market is more volatile and often negative in the month of October. It does have some truth to it; some of the more notable stock market crashes in history have taken place in October:

 

  • The Panic of 1907 (October 1907)

A financial panic threatened to engulf Wall Street, mostly owing to threats of legislative action against trusts and shrinking credit. There were multiple bank runs and heavy panic selling at the stock exchange. All that stood between the U.S. and a serious crash was a J.P. Morgan- led consortium that did the work of the Fed before the Fed existed.

  • Black Tuesday, Thursday and Monday (October 1929)

The Crash of 1929 was selling on an unprecedented scale because so many more people were involved in the market. It left several "black" days in the history books, each with their own record-breaking slides.

  • Black Monday (October 1987)

In 1987, for not entirely discernible reasons, the market suffered it’s greatest single day decline in history (23%). Global markets fell as the domino effect echoed across the world. The Fed and other central banks intervened, and the Dow recovered from the 22% drop quite rapidly and finished the year up about 5%.

 

Despite these crashes, however, most statistics disprove the “October effect” – it is more of a psychological spook than an actual phenomenon. In reality, September is the month with the weakest historical returns. This October we did experience quite a bit of market volatility, but economic indicators remain strong. Unemployment is the lowest it’s been since the 1960s, economic growth is above recent averages, taxes have been reduced for some, and interest rates are still reasonably low.

 

So, what’s going on? It’s good to remember that volatility is normal, but that doesn’t mean it’s fun. However, it doesn’t necessarily need to be stressful, either! As you’ve likely heard us say on numerous occasions, research clearly shows that market timing doesn’t work – it is not only ineffective at protecting against future losses, but perhaps even more damaging in missed opportunities to benefit from unexpected gains. Our Taurus Capital team cannot predict the future, but we do understand the behavioral and emotional responses that many investors are positively and negatively impacted by, and how to avoid the common pitfalls. Market declines happen for reasons that can, at best, be retroactively explained, but that doesn’t help us yesterday. Consequently, our investment approach is based on the knowledge that markets can and will fluctuate. We expect them to. Our portfolio construction and diversification methodology is designed to let the markets work to our advantage and increase your odds of success.

 

As always, if you have any questions or if there is anything we can help you with, please don’t hesitate to get in touch. We are always happy to discuss your investment portfolio and/or any other financial questions you may have, whether it be about mortgages, car loans, insurance products, second homes, long term planning, etc. We are at your service!

 

Thank you,

Greg

Economic Indicators at a Glance

 

Below you’ll find a snapshot of some top-line economic indicators, followed by the Quarterly Market Review. 

Data source: Trading Economics. 2018.

Market Summary
Third Quarter 2018 Index Returns

Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Market segment (index representation) as follows: US Stock Market (Russell 3000 Index), International Developed Stocks (MSCI World ex USA Index [net div.]), Emerging Markets (MSCI Emerging Markets Index [net div.]), Global Real Estate (S&P Global REIT Index [net div.]), US Bond Market (Bloomberg Barclays US Aggregate Bond Index), and Global Bond ex US Market (Citi WGBI ex USA 1−30 Years [Hedged to USD]). The S&P data are provided by Standard & Poor's Index Services Group. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. MSCI data © MSCI 2018, all rights reserved. Bloomberg Barclays data provided by Bloomberg. Citi fixed income indices © 2018 by Citigroup.

World Stock Market Performance

MSCI All Country World Index with selected headlines from Q3 2018

 

 

These headlines are not offered to explain market returns. Instead, they serve as a reminder that investors should view daily events from a long-term perspective and avoid making investment decisions based solely on the news.

 

Graph Source: MSCI ACWI Index. MSCI data © MSCI 2018, all rights reserved.
It is not possible to invest directly in an index. Performance does not reflect the expenses associated with management of an actual portfolio. Past performance is not a guarantee of future results.

World Asset Classes

Third Quarter 2018 Index Returns (%)

 

Looking at broad market indices, the US outperformed non-US developed and emerging markets during the quarter. Small caps underperformed large caps in the US, non-US developed, and emerging markets. The value effect was positive in emerging markets but negative in the US and non-US developed markets. REIT indices underperformed equity market indices in both the US and non-US developed markets. 

 

 

Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. The S&P data is provided by Standard & Poor's Index Services Group. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. MSCI data © MSCI 2018, all rights reserved. Dow Jones data (formerly Dow Jones Wilshire) provided by Dow Jones Indices. Bloomberg Barclays data provided by Bloomberg. Treasury bills © Stocks, Bonds, Bills, and Inflation Yearbook™, Ibbotson Associates, Chicago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield).

U.S. Stocks 

Third Quarter 2018 Index Returns

 

The US equity market posted a positive return, outperforming both non-US developed and emerging markets. Value underperformed growth in the US across large and small cap stocks. Small caps underperformed large caps in the US.

Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Market segment (index representation) as follows: Marketwide (Russell 3000 Index), Large Cap (Russell 1000 Index), Large Cap Value (Russell 1000 Value Index), Large Cap Growth (Russell 1000 Growth Index), Small Cap (Russell 2000 Index), Small Cap Value (Russell 2000 Value Index), and Small Cap Growth (Russell 2000 Growth Index). World Market Cap represented by Russell 3000 Index, MSCI World ex USA IMI Index, and MSCI Emerging Markets IMI Index. Russell 3000 Index is used as the proxy for the US market. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. MSCI data © MSCI 2018, all rights reserved.

Real Estate Investment Trusts (REITs)

Third Quarter 2018 Index Returns

 

US real estate investment trusts outperformed non-US REITs in US dollar terms.

 

 

 

Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Number of REIT stocks and total value based on the two indices. All index returns are net of withholding tax on dividends. Total value of REIT stocks represented by Dow Jones US Select REIT Index and the S&P Global ex US REIT Index. Dow Jones US Select REIT Index used as proxy for the US market, and S&P Global ex US REIT Index used as proxy for the World ex US market. Dow Jones US Select REIT Index data provided by Dow Jones ©. S&P Global ex US REIT Index data provided by Standard and Poor's Index Services Group © 2018.

Select Country Performance

Third Quarter 2018 Index Returns

 

In US dollar terms, Israel, the US, and Sweden recorded the highest country performance in developed markets, while Ireland and Belgium posted the lowest returns for the quarter. In emerging markets, Thailand and Qatar recorded the highest country performance, while Turkey, Greece, Egypt, and China posted the lowest performance.

 

Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Country performance based on respective indices in the MSCI World ex US IMI Index (for developed markets), MSCI USA IMI Index (for US), and MSCI Emerging Markets IMI Index. All returns in USD and net of withholding tax on dividends. MSCI data © MSCI 2018, all rights reserved. UAE and Qatar have been reclassified as emerging markets by MSCI, effective May 2014.

Fixed Income

Third Quarter 2018 Index Returns

 

Interest rates increased in the US during the third quarter. The yield on the 5-year Treasury note rose 21 basis points (bps), ending at 2.94%. The yield on the 10-year Treasury note increased 20 bps to 3.05%. The 30-year Treasury bond yield rose 21 bps to 3.19%.

 

On the short end of the yield curve, the 1-month Treasury bill yield increased 35 bps to 2.12%, while the 1-year Treasury bill yield rose 26 bps to 2.59%. The 2-year Treasury note yield finished at 2.81% after an increase of 29 bps.

 

In terms of total return, short-term corporate bonds gained 0.71%, while intermediate-term corporates returned 0.80%.

 

Short-term municipal bonds declined 0.11%, while intermediate-term munis dipped 0.06%. Revenue bonds (‒0.16%) performed in line with general obligation bonds (‒0.14%).

 

 

 

 

Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Yield curve data from Federal Reserve. State and local bonds are from the S&P National AMT-Free Municipal Bond Index. AAA-AA Corporates represent the Bank of America Merrill Lynch US Corporates, AA-AAA rated. A-BBB Corporates represent the Bank of America Merrill Lynch US Corporates, BBB-A rated. Bloomberg Barclays data provided by Bloomberg. US long-term bonds, bills, inflation, and fixed income factor data © Stocks, Bonds, Bills, and Inflation (SBBI) Yearbook™, Ibbotson Associates, Chicago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield). Citi fixed income indices © 2018 by Citigroup. ICE BofAML index data © 2018 ICE Data Indices, LLC. The S&P data are provided by Standard & Poor's Index Services Group.

 

This report was prepared by Gregory Saliba.

 

 

Gregory Saliba

President, Taurus Capital Management

saliba@tauruscap.com

(503) 756-2972

 

 

 

 

20+ years in Corporate Finance, Debt Capital Markets and Investment Management

2010 Oregon Ethics in Business Award Recipient

Public Speaker on Risk, Behavioral Finance and Ethics

Finance Faculty Member (12+ years)

  • Willamette University, Atkinson Graduate School of Management

  • Portland State University, School of Business Administration

Extensive Community Involvement

 

 

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