Global Market Trends and Returns 3rd Quarter 2014

The end of a quarter is a popular time for investors to review what happened over the past three months. Below we review some three-month price trends to get an idea of the direction and magnitude of return streams for a wide range of world market indexes.

In the chart below, we see the U.S. Dollar ($USD) was in the strongest rising directional trend and increased smoothly. The second most increasing trend in magnitude was U.S. Long Term Treasury Bonds (TLT), though it made its move in just the past two weeks. The popular large company stock index, the Dow Jones Industrial Average ($INDU) and the broad-based bond index Barclay Aggregate Bond Index (AGG) lost a little during the quarter. Small company stocks, the Russell 2000 ($RUT), and the commodities indexes ($USD and GSG) lost over -9%. As I pointed out in “Interest Rates and Dollar Rising, Commodities Falling” interest rates started drifting up, driving up the U.S. Dollar, which then drove down many commodities. The decline in small company stocks is probably more a sign of an aging bull market in stocks.

Charts courtesy of: http://www.stockcharts.com ©StockCharts.com

Looking closer within the U.S. stock market at its individual sectors, the Healthcare and Technology sectors ended the quarter with the largest gains of around 3%. Energy was by far the largest losing sector over the past three-months with a decline of nearly -10%. Other weakness was Industrial and Utilities. That may be suggesting something about the markets anticipation of the economy.

I also include a bar chart below of the sectors for a different visual of the advance and decline within sectors. The trouble with only looking at the quarter end result is that it ignores what happened along the way. For example, in the line charts above we can see how the trends unfold.

I pointed out in “Interest Rates and Dollar Rising, Commodities Falling” that interest rates started drifting up, driving up the U.S. Dollar. When the Dollar and interest rates rise it can directly impact other markets like commodities, international stocks priced in Dollars, and interest rate sensitive markets like real estate and utilities. In the next chart I include the U.S. Dollar again to show its steady increase the past three months. Then we see that commodities like Gold (GLD), interest rate sensitive markets like Utilities (IDU), U.S. Real Estate REITs (IYR), and Mortgage REITs (REM) all declined materially. International stocks in Developed Countries (EFA) and Emerging Markets (EEM) also declined around 5 to 7%. None of these three-month price trends are permanent, but for those of us who tactically rotate between these world markets it is useful to understand how they all interact with each other.

You may notice when I speak of these trends I use past tense. The past tense is a grammatical tense whose principal function is to place an action or situation in past time. When I speak of trends, I’m always speaking of the past trend, never the future. These charts are created by looking back three months. It is not possible to draw a chart of realized trends looking forward three months. If we could do that, we would only need to do it once. If we could know for sure what just one of these trends would do in the future we could leverage a large bet, take the profit, pay the tax, and be done forever. Instead, we only have past price trends to study and draw inference from. Past data is all we have. As it turns out, that’s all I need.

 

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