As adherents to the Efficient Market Theory we believe it is impossible to beat the market over the long-term on a risk-adjusted basis. Nor do we believe it is a worthwhile pursuit. A corollary to this proposition is our opinion that events which influence markets’ directions and securities’ prices cannot be consistently predicted in the short-term. This past quarter was full of examples.
The equity market (S&P 500) was a roller coaster in the third quarter, up in July, down in August and then up again in September for a total gain of 5.24% for the period. Investors began selling on fears of a military strike against Syria for crossing the “chemical weapons” red line President Obama said would not be tolerated. Then after losing the support of Britain and announcing his intent to allow Congress a vote on the matter, the markets rallied. Next, Larry Summers, the President’s top pick for Federal Reserve Chairman, withdrew his name from consideration. The markets soared on this news believing Mr. Summers would have been more aggressive than other candidates in slowing monetary stimulus.
The Fed then announced after their 09/18 meeting that monetary policy would remain “as-is” and their $85 billion monthly bond buying program would continue. Ironically, this news, which is based on soft economic conditions, sent stocks even higher. Now, concerns over Congress’ decision to allow the government to “shut down” and the upcoming debt-ceiling battle are sending stocks lower yet again. It’s probably easier to pick the winner of the Super Bowl in October than to consistently guess the market’s gyrations.
The third quarter rewarded patient equity investors who possess a long-term commitment. Small U.S. stocks (S&P 600) out-performed their larger brethren with gains of 10.73%. International markets reversed course, with the more developed MSCI EAFE up an impressive 11.56% and the previously beaten-down Emerging Markets (MSCI EM) up 5.77%. Bonds, as expected, posted modest returns of 0.63% for the period (Barclay’s 1-5 Year Government/Credit).
This past quarter demonstrates how futile the attempt to time markets can be. Investors placing bets based on geo-political or macro-economic influences can quickly find themselves on the wrong side of those bets. It makes absolutely no sense to base long-term investment decisions on short-term influences which cannot be predicted with any consistency. Being on the wrong side can quickly destroy years of prudent planning and financial progress.
Rather than attempting to outguess the market we believe investors should focus on goals that are more important such as quantifying the resources needed to fund retirement or educating their children. We can then work to develop a plan designed to achieve those goals with a reasonable probability of success at reduced costs and without unnecessary risk. The result of that effort may be more certain than guessing the outcome of the Super Bowl.