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Treasuries Flat
Treasuries often rally when stocks fall sharply, but
this time they rallied only to sell off a bit. The rally was
short-lived. Some said it was because China sold
some of its Treasuries as part of its effort to keep the
renminbi near its new peg, but it’s hard to know for
sure. For the year, the Barclays US Treasury 20+ Index
is down about 1.7% while the Barclays US Aggregate
Index is up about 0.5%. So, high-quality bonds have at
least largely held their value amid the sell-off, but
they haven’t provided as much relief as years past.
U.S. Market Bottom Aug. 25
The market hit its low on Aug. 25. At that point, nearly
all the equity funds in the Morningstar 500 were in
the red. However, the United States staged a nice rally
at the end of the week so that it was only about 3%
in the red for the year to date. So, we’ve had lots of
wild swings, but the end result isn’t all that dramatic
in the U.S.
Where Are the Bargains?
China’s A-share market fell 15% in August while
emerging markets fell 13%, foreign markets fell
9%, the S& P 500 fell 7%, and Treasuries were flat.
But I doubt that China A-shares are actually the
best bargain out there.
A better gauge would be five-year returns. The MSCI
Emerging Markets Index is down 1% annualized
for the trailing five years while China A-shares are up
5% annualized. MSCI EAFE is up 6.4% annualized,
and the S&P 500 is up 16% annualized.
While performance isn’t the same as valuation, the
stark differences in five-year numbers do suggest
that emerging markets are the better rebound bet
than the U.S. It also illustrates why the U.S. might
sell off significantly before the next wave of bargain-
hunters jumps in. At the end of August, our stock
analysts estimated that the U.S. market was trading
at about 90% of fair value. That’s cheaper than most
of the past five years but nowhere near the figures
in the 60% –70% range it touched in 2008 and 2009.
What’s Fund Managers’ Take?
Templeton Global Bond TPINX manager Michael
Hasenstab says China will right itself but the real
bargains are in other emerging markets: “While we do
expect moderation in China’s growth, we continue
to see it as healthy and an inevitable normalization for
an economy of its size. By and large we think markets
have severely overreacted. We are seeing bargains we
haven’t seen since the late 1990s.
Making Sense of the Market Tumble
Continued From Cover
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Three-Month Market Drop in Value of $10,000
As this graph of the drop in value of an initial $10,000 investment shows, the summer sell-off was brutal for China and emerging markets. Developed markets
suffered much more-muted losses, while U.S. bonds were flat. Data from 06/01/15–08/31/15.
06/2015 07/2015 08/2015
12,000
10,800
9,600
8,400
7,200
p MSCI EAFE NR USD p MSCI EM NR USD p Barclays US Agg Bond TR USD
p MSCI China A NR USD p MSCI EU NR USD p S&P 500