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Benchmarks Continue Their Decline: TGC Q3 2015 Market Review

The major benchmarks continued their decline in September, and, in an ironic twist, when the Fed decided to keep rates on hold, the markets retreated further due to their interpretation that the Fed believes the U.S. financial markets are in a fragile state. There also remain concerns about the slowing Chinese economy, the world's second largest, and how that may impact global and US domestic profits.

Year-to-date, the S&P returned negative 5.29% through Sept 30 2015, with the Dow Jones index faring even worse.

Further highlighting the fragile economy was the pricing of the 3-month U.S. T-Bill at the end of September at a yield 0.00% (yes, zero). The 10-year U.S. Treasury bond, which is what most mortgages are priced off, was 2.06% at quarter-end. Low yields point to a Fed remaining on hold through 2015—which has been our position at Tidegate Capital for over a year. As investors, perhaps we should feel fortunate that at least in the U.S. yields are zero or slightly positive, unlike many of our European counterparts where negative yields are becoming the norm. This year Austria, Finland, France, Germany, Spain, and Switzerland have all sold short- and medium-term bonds at negative yields, meaning that investors have been willing to pay for the privilege of lending to those governments.

Recently, Tidegate Capital attended a seminar in Boston that was focused on practical investment ideas, a refreshing change from the standard broker conferences pushing new stock ideas and repackaged products made to look different, though are often complicated to grasp. There were a number of points of interest that we found relevant to today's environment and should serve as a solid footing going forward.

The investment themes all focused on a number key ideas:

  • In today’s world of global interconnectedness and decreased central bank influence, it is critical to look for investments that have the potential for positive returns in various economic scenarios and that have low correlations to other investments in one's portfolio.

  • Smaller managers, with their ability to remain nimble and make investment changes without impacting the market, may be able to deliver higher risk-adjusted returns.

  • Don't pay for Beta. In other words, if you are investing in the stock market, research shows it’s nearly impossible for mangers to consistently beat the market and explains the recent rise in market indexed ETF’s.​

  • Increase the likelihood of outperformance by looking for investments with a dividend component that provides a source of income when the general markets decline; dividends may also have the ability to keep pace with inflation…when it returns.

One other area of discussion we found interesting was focused on Europe and how the current low expectations for the markets there may in fact present a long-term opportunity. Investing there will require a faith in their capital markets, assets to remain invested, and ensure that as an investor your portfolio is structured properly for your risk profile with a highly diversified allocation mix.

What is clear is that recent events are driving home the point of investing in alternative investments that are non-correlated to traditional markets. Please feel free to contact us with any questions or comments.

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