Since October is the only time of the year when each of the “Big Four” professional sports leagues schedule games, you may have missed the trigentennial anniversary of “Black Monday”. By way of reminder, it was thirty years ago, October 19, 1987, when the Dow Jones Industrial Average plunged 508 points — a mind-boggling 22.6% — in the worst one-day crash in U.S. stock-market history. Black Monday’s decline would equate to 5100 points today.
The speed and severity of what was essentially a one-day bear market was ultimately attributed to a heretofore unknown term: Computerized trading. Turns out the event, hard as it is to imagine three decades later, was the result of rapid-fire computer trades using stock-index futures to “protect” the values of institutional portfolios. Why futures? Because stocks, unlike commodities, included no single security representing the broad market — an index number for traders to bet on.
The Securities and Exchange Commission, in perhaps the agency’s shiniest moment, let it be known that it was interested in approving such an instrument should it be devised. Lots of folks tried, lots of folks failed. After five years, Wall Street’s financial engineers finally came up with a structure that resolved the complexities involved with trading a basket of securities in real time.
On Jan. 22, 1993, shares of Standard & Poor’s Depositary Receipts Series 1 were listed on the American Stock Exchange. Immediately known as SPDRs, they were managed by State Street Global Advisors, they were benchmarked to the S&P 500, and they represented the first exchange-traded fund in the U.S.
Interestingly, it took more than two years for the next ETF to be listed, this one based on the S&P MidCap 400, and almost three more years for the third, based on the Dow, to appear. Initially, all U.S. ETFs stuck to the SEC’s original preferences and were based on established stock-market indexes. Over time, other asset classes, investing strategies, and even actively managed ETFs have gotten the green light from regulators.
So, yeah, it was the SEC that birthed the idea of ETFs. Who would’ve guessed.
What the equity markets have been doing…
Stocks continued their advance into record territory across the period as the flow of major third-quarter earnings reports picked up and entered its second week. Stronger-than-expected results from IBM helped the stock surge nearly 9% on Wednesday, providing a particular boost to the narrowly-focused Dow. Among the sectors, Financials outperformed while Consumer Staples and Energy gave back some of their previous gains.
Expectations for a tax cut and resultingly stronger economic growth also boosted the market’s good sentiments. Data in for the period included good manufacturing numbers, lower weekly jobless claims, and surprisingly higher existing home sales.
|INDEX||Friday’s Close||One-Week Point Change||Year-to-Date Change|
What the fixed income markets have been doing…
The positive economic data and hopes for tax cuts gave Treasuries and investment-grade corporate bonds enough of a boost to end nearly unchanged for the period. The high yield bond market, meanwhile, traded with a quiet but positive tone. On the tax-free side, strong demand last week helped the space end up mostly unchanged.
|FIXED INCOME||Period||YTD||12 Months||Yield|
|U.S. Investment Grade||NC||5.3%||2.5%||3.2%|
|U.S. High Yield||-(0.1)%||7.5%||8.2%||5.3%|
|Non-U.S. Developed||NC||8.3 %||0.6%||0.8%|
What Fund Architects has been doing…
Things continue to go well for equities overall, and higher-risk areas of the financial market continue to outperform especially. Despite the broader markets’ gains this year, investors are remaining calm and equity prices continue to move higher against a backdrop of very low volatility.
Our October equity trades in to Global Materials and Global Industrials are playing our fairly well in the Global ETF Portfolio, as has our fixed income trade in to USD Emerging Market Debt for the Conservative Global ETF Portfolio.
All in, there appears to be continued good prospects for equities in an environment of steady economic expansion, easy financial conditions, and strong corporate earnings. While there are any number of events that could change this positive backdrop, we’re remain confident in our Mulit-Factor Ranking System’s ability to keep up with any changes.
What the numbers are saying…
BlackRock’s assets under management at the end of September, helped by rising equity markets and billions of dollars flowing into its exchange-traded funds.
Vanguard’s assets, after investors plowed nearly $300 billion into its funds in the first nine months of this year.
What the pundits have been saying…
“I would be concerned if retail investors were euphoric about equites as they were in 1999 or 2007. They are generally optimistic, but not excessively so.”
- Byron Wein, vice chairman of Blackstone Advisory Partners
What people have been saying…
“To the extent we get the tax deal done, the stock market will go up higher. But there’s no question in my mind that if we don’t get it done you’re going to see a reversal of a significant amount of these gains.”
Steven Mnuchin, U.S. Secretary of the Treasury
The views in this commentary are those of Fund Architects. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this commentary, will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. Moreover, you should not assume that any discussion or information provided here serves as the receipt of, or as a substitute for, personalized investment advice from Fund Architects or any other investment professional. The information contained within this commentary should not be the sole determining factor for making investment decisions. To the extent that you have any questions regarding the applicability of any specific issue discussed to your individual situation, you are encouraged to consult with Fund Architects. Information pertaining to Fund Architects advisory operations, services, and fees is set forth in Fund Architect current disclosure statement, a copy of which is available upon request. Fund Architects, LLC is an SEC Registered Investment Advisory Firm.