Nola Kulig
Kulig Financial Advisors
Longmeadow, MA, 01116 USA
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2015 Q3 Market Review: China Dominates the Headlines and Rate Increases get Deferred

October 19th, 2015

This is our third quarterly review of the markets for 2015. As you know, we do not believe in making forecasts, but we comment on cross currents influencing the markets. As usual, our goal is to look at recent market results, put them in perspective, and see how that experience should set our expectations going forward.

This month’s newsletter looks at the following topics:

  • 2015 Q3 Markets Review
    • Summary of Returns
    • Factors Influencing Performance
  • What Does all This Mean?
    • Perspective on Long-Term Stock Returns
    • Perspective on Long-Term Stock Volatility
  • Thanks to those who responded on the Fiduciary Standard!

2015 Q3 Market Review

Summary of Returns

The third quarter brought us some of the worst stock market returns since 2011, although if you were diversified and owned some bonds, you were better off:

  • Large cap stocks did better than medium and small companies
  • US stocks did better than non-US stocks. Emerging markets had a very rough time.
  • Bonds held up well during a tough period for stocks
  • Real estate investment trusts (REITs), particularly those in the US, held up well
  • Master limited partnerships did terribly, declining with oil prices
  • Commodities besides oil also slid, but gold held up relatively well. It is beginning to perk up with a growing perception that the Fed may be on hold for a rate increase
Market Returns
Market Index September Q3 2015 2015 YTD
Large Cap S&P 500 Index -2.5% -6.5% -5.3%
Midcap S&P Midcap -3.2 -8.5 -4.7
Small Cap S&P Small Cap -3.5 -9.3 -5.5
Non-US Developed Markets MSCI EAFE -5.1 -10.2 -5.3
Emerging Markets MSCI Emerging Mkts. -3.0 -17.9 -15.5
US Bonds Barclays US Aggregate 0.4 0.5 -3.9
REITs S&P US REIT 3.1 2.1 -4.2
MLPs Alerian MLP -15.3 -22.1 -30.7
Gold Dow Jones-UBS Gold Sub index Total Return -1.5 -5.0 -6.2
Commodities Dow Jones-UBS Commodity Index TR -3.1 -14.4 -15.7

Sources: AJO Partners, Factset, Dow Jones Indexes

Factors Influencing Performance

Focus globally swung from Greece to China’s economic slowdown. More importantly, it caught the US Federal Reserve’s attention.

The September meeting at the Federal Reserve was eagerly anticipated by analysts, economists, and short-term investors because there was the real possibility that central bankers would finally boost the fed funds rate for the first time in almost 10 years.

In case you missed it, the Fed chose not to raise rates in September, but left open the possibility we might see an October or December move.

At the press conference that followed the Fed’s decision, Fed Chief Janet Yellen said the economy “has been performing well and impressing us by the pace at which it is creating jobs…” Still, that wasn’t enough for the Fed to pull the trigger.

Instead, worries about what’s happening in China and emerging markets were the primary reason the Fed chose to stay on hold. As Yellen noted at her quarterly press conference, “We focused particularly on China and emerging markets.”

As additional economic indicators have since become available, investors are questioning whether a December rate increase is still possible, and some of the Federal Reserve board members are expressing greater doubt on that score than they did earlier this year. However, there are those who still argue that the current economic environment is reasonably stable, and a fed funds rate that is stuck at zero is no longer needed.

While the Fed’s actions are important and have potential to impact various asset classes, it’s also important to filter out “the noise” that only the shortest-term traders might find of value.

In other words, let’s put the last Fed meeting into perspective. Will it really matter one year, or five years, or 10 years from now that the Fed chose to raise or not raise interest rates at the September 2015 meeting? It won’t.

It’s the long-term that really matters, not the day-to-day or month-to-month gyrations in the market.

As the influential economist Paul Samuelson once said, “Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.” It’s why I counsel that it is sometimes best to skip the financial news channels that focus on the ever-changing crisis of the month.

If we properly understand your tolerance for risk, then even those volatile days won’t be very unsettling. And if they do bother you, that means we should be focusing on your true risk tolerance and design a different portfolio. But this does not mean that we change strategy in response to every new piece of data or press headline. What we want is the highest risk portfolio you can tolerate on even the worst days in the market.

What Does All This Mean?

Perspective on Long-Term Stock Returns

The following may sound like a lot of statistics, but if you bear with it, it may help with longer term perspective on stocks, why we own them, how they behave, and realistic expectations we should have for them.

Since 1928, the annual total return for the S&P 500 Index has averaged 11.5%, with the best return of 52.6% occurring in 1954 and the worst return of -43.8% occurring in 1931 (Stern School of Business at New York University).

Sixty-three years were positive and 24 were negative.

Since 1965, the annual total return for the S&P 500 Index has averaged 11.2%, with the best return of 37.2% occurring in 1995 and the worst return of -36.6% occurring in 2008. On a side note – while 2008 was a wretched year and nearly all asset classes took a temporary hit, stocks did bounce back nearly 26% the following year.

Continuing with our format, that is 39 years in the green and 11 years in the red. Simply put, the ratio improved over the last 50 years.

So far, this is pretty straight forward and supports the argument that stocks have a place in most portfolios, assuming at least a medium timeframe.

Perspective on Long-Term Stock Volatility

As you read the following, just keep in mind that volatility (standard deviation) just means how much variation there is in stock returns.

Since 1928, the standard deviation of that annual 11.5% return has been 20%, which means that about 67% of all annual returns should fall between 11.5% plus or minus 20%. Or a range of  -8.5% to 31.5%.

If we go out two standard deviations, about 90% of all annual returns should fall between -28.5% and 51.5%.

Interestingly, the standard deviation declined to 17% from 1965-2014, so two-thirds of all returns should fall between -5.8% and 28.2%. And 90% of all returns would land between -22.8% and 45.2%.

In reality, we experienced only two of the 50 years outside the range, with both years coming in below -22.8%.

One last observation–diminished volatility over last 50 years (given the lower standard deviation), did little to reduce returns.

What does all of this mean?

What I’ve provided is a high-level review of S&P 500 stock returns and volatility that surround the average annual returns. Some investors would easily look past such volatility while others would experience sleepless nights at the thought of their portfolio losing “two standard deviations” in one calendar year, even if the odds are low.

Only you know how you will react. That’s why I counsel – Investor, know thyself!

It is also why I recommend what’s called an “asset allocation approach,” where we hold more than just one class of assets.

In addition to stocks, this would include various types of bonds that not only produce income, but have historically experienced much less volatility over the long term.

For example, the standard deviation for the average annual return of the 10-year Treasury has been 7.8% since 1928, which is less than half that of stocks. In other words, there are fewer ups and downs in Treasuries, which helps to reduce risk and volatility.

When we are young and may not need any cash for decades, it is usually wise to focus on capital appreciation, which entails more risk. But as we age, preservation of capital, quick access to our funds, and regular income become equally if not more important.

That’s why the current correction has had less impact on those who have reduced exposure to stocks. But remember, these portfolios would be hard pressed to match stock market indexes when the bull market is raging.


While it’s easy to adhere to the investment plan when times are good, some investors find it difficult when the road gets a bit rocky.

It’s during times like these that detours tempt the investor. In most cases, however, you’ll wind up in an unfamiliar neighborhood, and the delay will cost you precious time.

I always emphasize that as your financial advisor, it is my job to partner with you. If you ever have any questions about what I’ve conveyed in this month’s message or want to discuss anything else, please feel free to reach out to me.

Thanks to those who responded on the Fiduciary Standard!

Last month I reached out to everyone I could regarding the Department of Labor’s proposal for a fiduciary standard for retirement accounts owned by individual investors. I want to thank those of you who took the time to contact your congressional representatives, including those of you who were complimentary of my work as a fiduciary advisor. Although we are still awaiting the decision on the ruling, the industry is getting itself ready. We will update you when we hear the outcome. Please know that it is the trust my clients place in me that keeps me going in this profession.

Supporting the Fiduciary Standard: You Can Help, too!

September 2nd, 2015

Earlier this year, I shared an announcement regarding Sheryl Garrett’s work on the fiduciary standard. You may remember that she testified in Washington, DC and that President Obama quoted her summary on the topic.

Since then, if you did not know, the Department of Labor has proposed a rule that ALL financial advisors providing retirement advice act as a Fiduciary.  Currently, only Registered Investment Advisory firms and their advisors act in this capacity.  Brokers and registered representatives are required to follow a suitability rule.  As long as the investment, insurance product or portfolio is suitable, it can be recommended, regardless of cost or whether it is best for the client.

The reason I became a fee-only advisor was my past pension consulting experience. I was able to see the bargaining power of corporate America with Wall Street, and how poorly individual investors fared by comparison. So I decided to do something personally about it, leading to the current phase in my career.

I have written to Washington in support of the standard, as have many of my Garrett colleagues. But you can help, too, and we need you to.

This is what we are up against:  These videos are slick and effective in appealing to emotions.  Wall Street has millions to spend on what is basically misinformation. By contrast, fiduciary advisors and their professional organizations have only thousands.

For the real story, I encourage you to read this article:

I would be grateful for any support you are willing to provide.

How you can help

The deadline for when you can help is roughly mid-September, depending on how quickly the Department of Labor proposal revisions progress. So now is the time for public comments. If you are willing, I ask for your support by either sending an email or a letter expressing your support and experiences of receiving fiduciary advice from me, especially if you received advice in the past from an advisor in another firm.

1. Contact your Senator to speak out in favor of the fiduciary standard rule and Fee-Only planning.

2. You can send an email to e-ORI@dol.govand include RIN 1210-AB32 in the subject line of the email.

3.  A letter can be sent to:

Office of Regulations and Interpretations
Employee Benefits Security Administration
Attn: Conflict of Interest Rule
Room N-5655
U.S. Department of Labor
200 Constitution Ave NW
Washington, DC 20210

4. OR you can tell Washington how you feel using this link:

Your comments need not be long, but it is important that if you agree with the fiduciary standard that Washington hear from real people, not just from Wall Street.

Thanks in advance for your help, and for any questions, please get in touch!


Investment advisor representative of an investment advisory services offered through Garrett Investment Advisors, LLC, a fee-only SEC registered investment advisor. Tel: (910) FEE-ONLY. Kulig Financial Advisors may offer investment advisory services in the state of Massachusetts and other jurisdictions where exempted.