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Global Contagion Fears

Weekly Commentary, 1/11/16 – 1/15/16

The S&P 500 Index shed another 2.2% this week putting its decline approaching 9% year to date. Even harder hit were the Russell 2000 Small Cap Index and the NASDAQ Composite falling 3.70% and 3.30% respectively. The primary culprit continue to be China, where investors fear the total collapse of the world’s second largest economy, and falling energy prices. However, this week U.S. economic weakness added to the negative sentiment as GDP forecasts and earnings estimates were cut. The Shanghai index plummeted 9% for the week (18% year to date) and is down 45% from the highs set last June. Oil fell below $30.00 a barrel and ended the week at $24.92 a barrel, down 11%. Being perceived as a safe haven, the yield on the 10-year U.S. Treasury declined to 2.03% after trading briefly below 2.00%. It is interesting to note that the yields have declined from 2.30% in December when the Federal Reserve raised short term interest rates for the first time in almost 10 years.  

With equities tanking for the third week in a row the S&P 500 is now in correction territory (-12%) from the highs established in 2015. But the S&P 500 tells only half the story; the Russell 2000 Index is in bear market territory down over 20% from its 2015 high. Bank stocks fell into a bear market last week. The developed markets are approaching bear market territory and the emerging markets are clearly in a bear market.  

Market breadth and internals have looked horrible for months, and now the fundamentals are coming into question as street analysts are lowering earnings estimates and price targets.  The S&P 500 is retesting support levels at 1880. Failing to hold this level leaves the next support area at 1820 (October 2014 lows).

Nervous investors are making comparisons to the 1998 currency crisis, the 2008 real estate bubble and even the great depression. Economic historians know that in 1937 the Fed mistakenly tightened policy after easing in 1933 and many believe that caused the second leg down in the Great Depression.   

We don’t know, nor will we attempt to predict, if we are entering a full blown bear market or if we are just experiencing a normal correction in a cyclical bull market. What we will do is manage our client assets with process and discipline, not a crystal ball. Market action has moved us to more defensive positions across our strategies.  As market conditions improve those same processes are in place to seek participation in market gains. 

The Stadion Managed Account Risk objectives are managed using a “core/satellite (Flex)” approach. The core positions will comprise 40-60% of the portfolio and are invested in equity, fixed income and money market instruments with the strategic allocation becoming more risk averse as the risk tolerance of each fund changes. In allocating the objective’s Flex assets the remaining 40-60% of each portfolio, Stadion uses a proprietary, rules based weight of the evidence model. The Flex portion of the portfolios remain in their most defensive position per the risk objective. 

 


Past performance is no guarantee of future results. Investments are subject to risk, and any of Stadion’s investment strategies may lose money. The investment strategies presented are not appropriate for every investor and financial advisors should review the terms and conditions and risks involved. Stadion’s actively managed portfolios may underperform during bull markets. Some information contained herein was prepared by or obtained from sources that Stadion believes to be reliable. There is no assurance that any of the target prices or other forward-looking statements mentioned will be attained. Any market prices are only indications of market values and are subject to change. The S&P 500 Index is the Standard & Poor’s Composite Index of 500 stocks and is a widely recognized, unmanaged index of common stock price. The NASDAQ Composite is a stock market index of the common stocks and similar securities listed on the NASDAQ stock market and it is highly followed in the U.S. as an indicator of the performance of stocks of technology companies and growth companies. The Russell 2000 Index is a small-cap stock market index of the bottom 2,000 stocks in the Russell 3000 Index. It is the most widely quoted measure of the overall performance of the small-cap to mid-cap company shares. The Shanghai Stock Exchange Composite (SHCOMP) Index is a capitalization-weighted index that tracks the daily price performance of all A-shares and B-shares listed on the Shanghai Stock Exchange. It is not possible to invest directly in indexes (like the S&P 500) which are unmanaged and do not incur fees and charges. The Sharpe ratio measures the excess return per unit of deviation, or risk. Any references to specific securities or market indexes are for informational purposes only. They are not intended as specific investment advice and should not be relied on for making investment decisions.

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Past Performance is no guarantee of future results. Investments are subject to risk, and any of Stadion's investment strategies may lose money.