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High Yield and Energy Pressure

Weekly Commentary, 12/7/15 – 12/11/15

Stocks cratered over the week as high yield bonds were routed and oil fell to a cyclical low of $36 a barrel.  The S&P 500 Index declined -3.70%.  The NASDAQ Composite fell almost -4% while the Russell 2000 was the big loser on the week shedding almost -5%.   The VIX closed at 24, well above the psychologically important 20 level.   The benchmark U.S. 10-year Treasury Note rallied 8 basis points to close the week at +2.21% as investors flocked to less risky assets.

The markets traded heavy early in the week on recent concerns including falling energy prices, European Central bank disappointment and the long-anticipated first interest rate increase from the Federal Open Market Committee in almost a decade.  The selling intensified on Friday when Third Avenue Focused Credit Fund took the nearly unprecedented step of halting redemptions so that it could close down in an orderly fashion without resorting to fire sales.  Third Avenue is a mutual fund that invests in high yield securities.  Investors won’t be getting their cash back for months or more.  The suspension shook the entire market with iShares iBoxx High Yield Corporate Bond ETF (HYG) and the SPDR Barclays High Yield ETF (JNK) both plunging -2% on Friday with huge volume.  The Third Avenue liquidation will fuel anxieties about whether funds that hold, or rely on, illiquid securities will be able to meet a surge of redemptions in times of market stress. 

From a technical standpoint, all major equity indexes are again below their respective 50-day and 200-day moving averages and the market’s breadth indicators experienced significant damage as well.  

The Third Avenue news brought painful memories of the Reserve Primary Fund “breaking the buck” back in ’08 and the closure of two Bear Stearns hedge funds.  Will investors begin asking “who’s next?” Many have predicted that the high yield market will foment the next crisis, including investor Carl Icahn who recently referred to it as a “keg of dynamite”.  

Will the pressure in the high yield market and energy sectors develop into a full blown crisis?  We don’t know the answer to that question but we do know that bear markets and crises usually play out over an extended period of time with warning signs along the way.  At Stadion we will continue to monitor the markets and adjust our strategies consistent with the level of risk as determined by our processes. 

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.  With deterioration in this model the Flex portion of the portfolios are 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 VIX is the Chicago Board Options Exchange Market Volatility Index, a popular measure of the implied volatility of S&P 500 index options. Often referred to as the fear index or the fear gauge, it represents one measure of the market's expectation of stock market volatility over the next 30 day period. 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.