After posting positive returns in the first two quarters of the year, the S&P 500 declined 6.4% in the third quarter of 2015. This represents the first negative quarter for the index since the fourth quarter of 2012 and the worst quarterly decline in four years. Although concerned about the sharp drop in the China stock market in June, U.S. investors didn't fully react due to the continued growth and relative strength of the domestic economy. In August, persistent struggles in China combined with dropping global hard asset prices, a strengthening U.S. dollar and uncertain monetary policy amplified fears of a global economic slowdown. Speculation surrounding what the Federal Reserve will do, and its ultimate inaction in September, contributed to the quarter's increase in volatility. All sectors of the S&P 500 declined during the quarter, except for Utilities (+5.4%). The Biotech sector was the worst performer for the quarter (S&P Biotechnology Select: -26.0%), ending its amazing 5+ year run.
As could be expected from the decline in the China market, broad emerging markets underperformed their developed counterparts: the MSCI Emerging Markets dropped 17.9% during the quarter while the MSCI EAFE dropped 10.2% during the same period. Even a healing European economy could not outweigh the macro global fears exacerbated by China. For the year, developed economies (S&P 500: -5.3%, MSCI EAFE: -5.3%) performed only slightly better than China (Shanghai Composite: -5.6%) although they arrived there in very different ways, as illustrated in the following graph:
Fixed Income securities produced slightly positive returns for the quarter, except high yield. The Barclays Municipal 1-10 Year Blend returned +1.3% for the quarter, driving the year-to-date gain to 1.6%. Taxable domestic and international bonds also experienced an increase with the Barclays U.S. Aggregate up 1.2% and the Barclays Global Aggregate ex U.S. up 0.6% for the quarter. While the Barclays U.S. Aggregate climbed into positive territory for the year (+1.1% YTD), the Barclays Global Aggregate ex U.S. still has a long way to go to reach a positive level (-4.8% YTD). The BofA Merrill Lynch High Yield Master II lost 4.9% in the third quarter.
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