Since the S&P 500 hit 2011 on September 18, it has forfeited 4.1%. That may not represent a significant decline. Yet, the year-to-date damage across an array of 18 popular asset classes is a bit more vexing.
| Depreciation Across 18 Unique Asset Classes | |||||||
| % Off 2014 High | 200 Day MA | ||||||
| Vanguard Total International Bond (BNDX) | 0.0% | Above | |||||
| Vanguard Short-Term Bond (BSV) | -0.1% | Above | |||||
| Vanguard Intermediate Bond (BIV) | -0.2% | Above | |||||
| iShares 20+ Treasury (TLT) | -0.4% | Above | |||||
| PowerShares Preferred (PFF) | -1.0% | Above | |||||
| PowerShares Emerging Market Sovereign (PCY) | -2.0% | Above | |||||
| iShares High Yield Bond (HYG) | -2.5% | Below | |||||
| S&P 500 SPDR Trust (SPY) | -4.0% | Above | |||||
| Vanguard REIT (VNQ) | -5.0% | Above | |||||
| SPDR Convertibles (CWB) | -5.3% | Below | |||||
| Vanguard MidCap (VO) | -5.9% | Below | |||||
| JP Morgan Alerian MLP (AMJ) | -8.1% | Above | |||||
| SPDR S&P Emerging Markets Small Cap (EWX) | -8.5% | Below | |||||
| Vanguard Emerging Markets (VWO) | -9.0% | Above | |||||
| Vanguard FTSE Developed Markets (VEA) | -11.1% | Below | |||||
| iShares Russell 2000 (IWM) | -11.3% | Below | |||||
| SPDR Gold Shares (GLD) | -12.0% | Below | |||||
| iShares Small Cap EAFE (SCZ) | -14.0% | Below | |||||
The two major areas that have entered official corrections – foreign developed stock ETFs and small-cap U.S. stock ETFs – started their precarious journey in July. Funds like iShares Russell 2000 (IWM), iShares Small Cap EAFE (SCZ) and Vanguard Developed Markets (VEA) have not only depreciated significantly in price, each is below its long-term trendline (200-day moving average). Higher yielding bond assets via iShares High Yield Bond (HYG) and SPDR Convertible Securities (CWB) have entered long-term downtrends as well. The depreciation may not be as destructive in the higher yielding bond arena. That said, the widening of yield spreads between high yield and investment grade is another closemouthed canary in the investment mines.
The initial troublemakers – high yield bonds, foreign stock ETFs, small-cap U.S. stock ETFs – caused a collective stir in July. It was not until the start of September, however, that we began to see other asset classes flounder. Energy MLPs, convertible bonds, emerging markets and mid-cap U.S. stocks suddenly became victims of selling pressure. ETFs like SPDR Convertible Bond (CWB), Vanguard MidCap (VO), SPDR S&P Emerging Market Small Cap (EWX) and JP Morgan Alerian MLP (AMJ) began to diverge from the more widely followed large-cap U.S. stocks in the Dow and the S&P 500; many were losing ground in mid-September even as the S&P 500 surged to an all-time record.
With the asset class canaries from July reeling – with a host of additional asset classes teetering in September – will the rest of the “risky assets” follow suit? It is beginning to seem that way. Granted, European leaders might say or do something to alleviate the fears of a global recession. Earnings season might prove far better than many are anticipating. What’s more, the U.S. Federal Reserve might serve up a statement to indicate that zero percent interest rate policy will continue well into the foreseeable future. (Note: I personally believe in the likelihood that overnight lending rates stay at 0% throughout 2015.)
On the flip side, the mid-term elections in November introduce uncertainty over which party may ultimately control the legislative agenda in Washington D.C. Corporate guidance on revenue and earnings might disappoint. And the CBOE S&P 500 Volatility Index (VIX) has been logging “higher lows” since early July. Additionally, the S&P 500 has traded more consecutive days above its 200-day moving average than at any other time in its history as a benchmark, and probability alone suggests a deeper sell-off is in the works.