- Earnings are surprising to the upside: 73% of firms that have reported results have beaten second-quarter earnings, which is in line with the 5-year average. The blended earnings growth rate for the entire S&P 500 has been revised higher since June 30th estimates.2
- Improving economic growth: Economists expect second-quarter US GDP to be revised higher, from 2.3% to 3.2%.3 A strengthening labor market combined with continued growth in household formation and consumer spending are driving the upward revision estimates.
Global growth was the market’s concern this past week. However, US data is improving and the Eurozone is showing promise, with Germany leading strong manufacturing reports. Continued accommodative monetary policies throughout the Eurozone and Japan should also support growth in those regions.
How to position for market turbulence
This stock market correction presents an opportunity for investors to reassess their holdings and portfolio construction strategy. When the dust settles, we believe that we’ll likely see the market return to an environment where growth-oriented segments do well as investors seek out opportunities in a macro-driven world.
This market volatility underscores the importance of portfolio construction and it reminds us of these guiding principles:
- Harry was right: Harry Markowitz, the author of modern portfolio theory, famously said diversification is the only free lunch. In times like these, investors are well served to remember this advice and ensure portfolios are diversified across a broad range of asset classes—from equity and fixed income to real assets, such as the tail risk protection that Gold, which has rallied more than 4% in the last week, can offer.
- Don’t do it alone: Investors who pick single stocks to play market themes may find themselves feeling exposed and might want to consider sector investing instead. If we examine the holdings of the Energy Select Sector Index on Monday, the worst performer in the index was down 10.35%. Meanwhile, the average stock was down 5.47% and the Index dropped 5.23%.4 That means that if you chose the wrong individual stock, you would have been off 5% from the benchmark. Sectors and Industries can provide the diversification that’s needed when the market presents thematic opportunities.
- Fixed income portfolios need balance: The Barclays U.S. Aggregate Index was up on Monday as Treasuries rallied. While the long end of the curve rallied the most, long term Treasuries only account for 5% of the Agg—illustrating how the Agg’s exposure offers a narrow slice of the bond market.Credit suffered as risky assets faced headwinds, but the Agg’s exposure may not be optimal for investors who are looking to have the full breadth of fixed income in their portfolios. For investors who want to balance credit and interest rate risk, it might be time to consider barbell strategies to help navigate today’s market.
As markets continue to gyrate, investors should take the time to reevaluate their methods of portfolio construction, and ensure that they remain sufficient to meet client risk profiles and long-term goals.
1As represented by the Bloomberg Commodity Index. Source: Bloomberg, SSGA, as of 8/24/2015
2FactSet, as of 8/24/2015
3Bloomberg Economic Forecasts, as of 8/24/2015
4Bloomberg, as of 8/25/2015
David Mazza is a Vice President of State Street Global Advisors and the Head of Research for SSGA’s ETF and mutual fund businesses.