Market Summary: April

Continued Positive Markets and Lower Volatility in April

After very strong returns in stock markets around the world during March, April may have seemed lackluster. Yet, in a historical context, it was another solid month. Although the month ended on a sour note, with stocks falling due to surprises from the Bank of Japan and late news on U.S. economic growth, stocks did end up positive for the month. Once again, international stocks led the way. Last month international emerging markets set the pace, whereas this month it was international developed markets. The MSCI EAFE Index, an index of developed-market stocks, posted a 2.9% gain for the month.  U.S. stocks lagged somewhat but did see positive returns, despite disappointing earnings reports from major technology firms, with a few exceptions, notably Facebook. Bond prices were up slightly, as gauged by the Barclays U.S. Aggregate index.

Continuing the welcome trend that started last month, stock-market volatility was more subdued than the early months of 2016. In the thirty-nine trading days of January and February, the S&P 500 (an index of Large-Cap U.S. stocks) moved by more than 1% on twenty-three days. In March, this fell to only three days over the month. In April, there were again only three days.

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Mixed Messages

What drove these returns? First, central banks around the world have continued to maintain low (in some cases negative) short-term interest rates and to signal that any increases in rates will be gradual.  This removed one potential fear in stock markets and MAY SIDEBARmade for a quiet month in bonds. However, at the end of the month the market was surprised by the Bank of Japan’s decision not to employ additional stimulus measures for the time being. Second, the economic news was mostly—though not universally—positive. In the United States new claims for unemployment insurance continue at historically low levels. But there was news late in the month of disappointing economic growth. In China, there has been more positive news of late, in contrast to gloomier news early in the year. Growth in industrial production picked up, with increased output from high-tech and manufacturing industries; however, the long term economic outlook still remains somewhat uncertain. Third, oil prices rose sharply in April, with crude prices up roughly 18%). In recent months we’ve seen an apparent link between oil prices and equity markets.

What it Means for You

At Financial Engines, we believe in the importance of a diversified portfolio with risk appropriate for your individual circumstances and preferences. Being diversified isn’t about having lots of funds in your portfolio; it is about being exposed to various sources of risk and return—investments that are unlikely to behave in the same way at the same time. Over the long term, this offers the best way to achieve growth in your portfolio without excessive risk. International stocks are an important part of a diversified portfolio because some of the forces that drive them are different from those driving U.S. stocks. In recent years, we’ve seen U.S. stocks do better than international ones. However, over the past two months, international stocks are the ones that have outperformed. It’s important to be exposed to both.

Talk to an advisor if you are uncertain about the level of risk in your portfolio.

Below are some typical allocations for investors planning to retire in 2020, 2030, or 2040. Please note that, because we tailor advice to your specific plan and circumstances, your portfolio will not precisely match these allocations.

Chart_April

In April, portfolios that held higher allocations in equities, both International and Domestic, would see stronger performance in their accounts–as riskier assets were positive for the month. Typically, these would be portfolios with longer time horizons, or those with more aggressive risk preferences. However, even those portfolios with a shorter time horizon on the growth objective would see positive performance as we do hold a good portion of those accounts in equities. It is important to note, even in the portfolios that are the most aggressive, we still maintain an allocation to bonds in order to diversify the overall exposures of the portfolio.

 

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Market Summary: March

March comes in like a bull

By any measure, March was a strong month. The commonly-cited S&P 500 Index was up 6.78% in March. That continued a rally in equity markets that began on February 11th of this year. This helped the index claw back from the losses earlier in the year, and achieve slightly positive returns year-to-date. The story for smaller domestic stocks was similar, as the S&P Small Cap 600 Index returned over 8.20% for the month.

The rally continued overseas as well. Emerging Markets led the charge, rising 13.23% for the month, and approximately 5.71% for the year. Developed International markets rose for the month, with the MSCI EAFE Index up 6.51%. However, the EAFE Index is still underwater for the year, down -3.01%. Volatility was significantly subdued in comparison to the high volatility we saw for the first two months of the year. There were only two days with increases in the S&P 500 Index of over 1% and one day with a decline of over -1%. This compares to the twenty-three out of thirty-nine days with moves greater than 1% in January and February. Bonds also rose slightly over the month with the Barclays US Aggregate up 0.92%.

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Central bankers step forward

Sidebar - Market Summary March - LONGDuring March, central banks – including the US Federal Reserve, the European Central
Bank and the Bank of Japan – maintained low interest rates across the globe. The Federal Reserve left the benchmark rate unchanged in March, and signaled that they expect rates to rise just twice over the coming year, not the four times that had been previously expected. They also indicated that global financial developments, like plunging commodity prices and weaker global growth, posed risks to the U.S. Equity market and that inflation continued to remain below target. At the end of the month, Federal Reserve Chairman Janet Yellen reiterated the view that interest rates would rise slowly, and that being cautious with changes was especially warranted.

Overseas, Emerging Markets rose throughout the month and the dollar weakened across a number of emerging market currencies. In addition, global investors increased allocations to emerging market equities as March had the highest inflow in nearly two years. The European Central Bank cut rates and expanded its asset purchasing program in an attempt to boost inflation and reinvigorate the Eurozone economy. After these actions, European shares rose, and the euro plunged. In Asia, the Bank of Japan refrained from changing their program to stimulate economic growth, which includes negative interest rates and asset purchases, as policy-makers gauged the impact on the overall economy.

What it means for you

So far this year we have seen a tale of two markets. Through the early part of the year, we saw a broad sell off, both in International equities and Domestic equities; however, risky assets have rallied and the market is now positive for the year.  This year’s volatility speaks to the importance of staying focused on your long term goals and objectives, and avoiding the knee-jerk response to short term changes in the market. If you haven’t already, consider personalizing your account and setting your risk preferences, so that your portfolio truly reflects your long term goals and objectives.

Below are some typical allocations for investors planning to retire in 2020, 2030, or 2040. Please note that, because we tailor advice to your specific plan and circumstances, your portfolio will not precisely match these allocations.

Table-1-March[1].png

In March, portfolios that held higher allocations in equities, both International and Domestic, would have seen stronger performance–as there was a rally in riskier assets. Typically, these would be portfolios with longer time horizons, or those with more aggressive risk preferences. However, even those portfolios with a shorter time horizon on the growth objective would see positive performance as we do hold a good portion of those accounts in equities.  It is important to note, even in the portfolios that are the most aggressive, we still maintain an allocation in bonds in order to diversify the overall exposures of the portfolio.

 

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Financial Engines Market Watch Q4: The Year Nothing Went Up

2015 was a strange year for financial markets. In most years, some asset classes do well, while others do poorly. But usually, some asset class does pretty well. Last year was noteworthy for how almost nothing did well – stocks, bonds, cash, commodities – nearly every major asset class posted low or negative returns for 2015. Fourth quarter returns for stocks were good, but the net for the year was pretty ho-hum.

The S&P 500 gained 7.0% in the fourth quarter to end up 1.4% for 2015, not far from where it started the year.  Smaller company stocks represented by the S&P Small Cap 600 index had a more modest fourth quarter, up 3.7% and closed the year down 2.0%.

Financial Engines Market Watch Q3: A Turbulent Quarter for Markets

It’s been a while since we last saw a correction in global stock markets – four years in fact. But Q3 once again reminded us that markets hit rough patches from time to time.

The S&P 500 fell over 6.4% in the third quarter and is now down 5.3% since the beginning of the year. For the trailing 12 months, the S&P 500 is nearly flat. Smaller company stocks represented by the S&P Small Cap 600 index had an even more challenging third quarter, dropping 9.3%.

International equity markets, buffeted by a slowing Chinese economy and volatile oil prices, experienced a rough quarter. The MSCI Europe, Australasia, and Far East (EAFE) index fell 10.2% over the last three months. Uncertainty around the Fed’s intentions for raising interest rates added to the worries for global investors.

As has been the case lately when equity markets drop, U.S. government bonds did well as investors sought refuge from the market’s volatility. Treasury yields fell during the quarter, and the Barclays U.S. Aggregate Bond index gained 1.2%.

The Financial Engines Perspective

Over the long run, stocks grow faster than most other types of investments. But the price for higher expected returns comes in the form of occasional periodic sharp downturns. The third quarter was a reminder that downside risk can reappear at any time. Diversified investors should not fear such market corrections. They are an expected element of investing for long-term growth. And it is in just such times of market turmoil that the greatest opportunities for gains materialize.

Our investment advisor representatives are available to answer any questions about your retirement strategy. If you are a Financial Engines customer, you can call an advisor representative at (800) 601-5957.

Financial Engines Approach Can Provide a Buffer from Market Volatility

In recent weeks, equity markets around the world have experienced anxiety-inducing swings.  Having a well-diversified portfolio tailored to your retirement goals—the cornerstone of Financial Engines’ investment approach—can lessen the impact of these events on your portfolio, but your portfolio’s value will still fluctuate.

The closer you are to retirement and being reliant on your portfolio for income, the more you need to be concerned about the riskiness of your portfolio. Here’s why: because of your limited investment horizon, you have less time to recover from losses and harvest the potential long-term benefits of investing in riskier assets like equities.

Income+ May Help You Weather the Storm

Financial Engines’ Income+* has a fundamentally different objective from our regular growth objective.  Instead of targeting portfolio growth at an appropriate level of risk, Income+ is designed to deliver a steady and sustainable level of income from your 401(k) savings (we call it a Retirement Paycheck), with the possibility of an increase in these payments over time should equity markets do well.

Let’s compare the portfolios of two typical 65-year olds, one with a growth objective and one using Income+.

Figure 1: Growth Objective

 

Figure 2: Income+

The participant in the growth objective (Fig. 1) has a lower allocation to bonds (45%) than the Income+ participant (Fig. 2), (75%).  The Income+ participant’s higher bond allocation probably resulted in a less painful August than was experienced by the growth participant. It’s important to note, however, that minimizing fluctuation in the portfolio’s value is not the objective for the Income+ investment strategy.  Instead, the strategy is designed to protect the sustainable payout from the portfolio, whether equity or bond markets go up or down.

The Income+ strategy selects bond investments that are intended to protect the sustainable payout from fluctuations in equity markets or changes in interest rates. The portfolio value may increase or decrease based on market conditions, but the retirement paycheck is designed to be stable or increase over time.

Income+ May Provide the Comfort You Seek

When you’re ready to use your 401(k) for retirement income, you deserve to sleep easy regardless of what is going on in the markets.  And Income+ portfolios are designed to generate steady payouts—with the possibility of raises over time, particularly when equity markets do well.

Find out if you are eligible for Financial Engines and then call one of our advisor representatives for help. We can work with you to learn more about Income+ and other retirement savings questions.

*Financial Engines® Income+ is a feature of Professional Management intended to provide income payouts from a 401(k). The Income+ feature is protected by U.S. Patent No. 8,521,633. FEA does not guarantee payout amounts or payouts for life.

Our Perspective on the Recent Market Volatility


After an extended period of relatively calm trading, U.S. equity markets dropped sharply last week with the S&P 500 retreating 5.8%.  On Monday, global markets plunged sharply again before rebounding from the morning lows.

Taking a longer view, the S&P 500 is down slightly from where it was 12 months ago.  International equity markets, particularly Asia, and most commodities also participated in the recent decline.

Coming after a period of unusually low volatility, the sudden shift in market sentiment caught many investors by surprise. In reaction to the stress in equity markets, government bond prices increased with a corresponding drop in interest rates. Given these events, investors are understandably concerned about the financial health and wellbeing of their retirement portfolios.

So what is going on?

There has been a sudden shift in investor expectations about future global growth. For the past few years, the global economy has been driven by growth coming from the U.S. and China. While the U.S. economy continues to do reasonably well, China has been experiencing a slowdown that is impacting other economies around the world. Concerns about China’s growth intensified when the Chinese government allowed a surprise devaluation of the yuan currency.

Adding to the uncertainty, oil prices have dropped dramatically putting pressure on energy companies. Falling energy and commodity prices imply that inflation remains below the desired rate of 2% targeted by the Federal Reserve, muddying the outlook for anticipated increases in the Federal Funds rate. The net impact of these recent developments in global markets is a big increase in uncertainty.

The Financial Engines perspective

It is helpful to keep in mind that downturns like that experienced last week are actually quite common in financial markets. Since 1946, the S&P 500 has dropped by 5% to 10% about sixty times, or once per year on average. Sometimes the downturns are larger, but on average markets have tended to recover their losses within a few months. Dramatic downturns like we experienced in 2008/2009 are much rarer.

We understand that sudden turns in the market can be unnerving to retirement investors. Market history teaches us that investor sentiment can change quickly and without warning. But this goes in both directions. Markets can turn up when you least expect it. Being out of the market when sentiment turns can be quite damaging to your long-term returns. To time the market, you must be correct twice – once to get out of the market at the right time, and again to get back in time to avoid missing a rally. It is almost impossible to time both of these decisions correctly. You are much better off pursuing a consistent strategy of a diversified portfolio in times when markets are volatile.

While no one knows the future, especially in these uncertain times, maintaining a long-term focus, with a balanced mix of equities, both domestic and international, risk adjusted for age, remains the best way to achieve your retirement goals.

If you are nearing retirement and the experiences of past market downturns are fresh in your mind, acting impulsively is probably not the best course of action.  Instead, please consider reviewing your total retirement income picture, not just risk and allocation of your portfolio, but also including future expected income streams such as a pension or Social Security. If you are a Financial Engines customer, Investment Advisor Representatives are ready to help you.  Feel free to call our Investment Advisor Representatives from 9 a.m. to 9 p.m. Eastern Time at (800) 601-5957.

Financial Engines Market Watch Q2: June 2015 Dampens the Second Quarter

Both domestic and international equity markets started the quarter strongly, but were tamed by a challenging final month. The S&P 500 fell over 1.9% in June, and returned just 0.3% for the quarter. The smaller company stocks represented by the S&P Small Cap 600 experienced a similar quarter, returning just 0.2%.

Internationally, equity markets started the quarter strongly but finished poorly. Economic and political challenges in Europe – particularly in Greece – once again dominated headlines and investor sentiment. The MSCI Europe, Australasia, and Far East (EAFE) index fell 2.8% in June, and rose just 0.6% overall for the second quarter.

Treasury yields rose during the quarter, and the bond market suffered accordingly. The Barclays U.S. Aggregate Bond index fell 1.1% in June and 1.7% for the full quarter.

The Financial Engines Perspective

The second quarter of 2015 was highlighted by speculation that Greece would default on its debts, and ultimately leave the Euro.

This speculation intensified in the quarter’s final week, dampening returns in domestic and international markets. But for diversified investors with a long-term view, these events do not remove the advantage of holding international equities.

While we can expect higher volatility in the near term, diversifying investments across international markets helps to reduce risk and improve expected returns. Our investment advisor representatives are available to answer any questions about your retirement strategy. If you are a Financial Engines customer, you can call an advisor representative at (800) 601-5957.

Financial Engines Market Watch Q1: Starting 2015 on the Bright Side

The year began on a bright note, with continuing positive economic news in the U.S. driving up equity prices. Once again, the S&P 500 set new all-time highs during the quarter, finishing up 1.0% by the end of March. Smaller company stocks in the S&P Small Cap 600 index had another strong quarter gaining 4.0%.

Unlike the previous quarter, markets also performed well overseas. Despite continuing economic challenges in Europe, the MSCI Europe, Australasia, and Far East (EAFE) index gained a solid 4.9% in the first quarter. Lower oil prices and global central bank moves to stimulate economic growth improved investor sentiment. However, over the last full year, the MSCI EAFE index is essentially even, showing a slight loss of 0.9%.

Interest rates dropped slightly during the quarter. The Barclays U.S. Aggregate Bond index gained 1.6% in Q1. Once again, the Fed indicated it would be cautious in raising interest rates, despite strong gains in U.S. employment.

The Financial Engines Perspective

The first quarter of 2015 was marked by turmoil in energy markets as oil prices varied widely. In addition, the U.S. dollar continued to strengthen relative to other major currencies, putting pressure on U.S. exporters.

Speculation about when the Fed will begin raising interest rates remains a key focus of investors. We can expect this volatility to continue as the market seeks consensus. To help you achieve your financial goals, Financial Engines pursues a diversified strategy, both to mitigate risks and seek growth.

Our investment advisor representatives are available to answer any questions about your retirement strategy. If you are a Financial Engines customer, you can call an advisor representative at (800) 601-5957.

Financial Engines Market Watch Q4: 2014 Was an Unusual Year

The year 2014 ended on a high note for U.S. equity markets, but not for the rest of the world. Global equity markets tend to move together, but in 2014 world equity markets went their separate ways. Propelled by strong economic growth in the U.S., the S&P 500 set new all-time highs, ending up 4.9% for the quarter and gaining 13.7% for the year. Stocks in the S&P Small Cap 600 index had a great fourth quarter, rising 9.9%. However, for the year, small cap stocks posted a gain of only 5.8%.

Anemic growth and high unemployment in Europe, combined with plunging oil prices dampened foreign stock returns. The MSCI Europe, Australasia, and Far East (EAFE) index lost 3.6% in the fourth quarter. For the year, foreign stocks were down 4.9% in striking contrast to the strong positive returns in the U.S.

Interest rates generally declined during the fourth quarter. The Barclays Capital U.S. Aggregate Bond index gained 1.8% in Q4, bringing the year-to-date gain to 6.0%. Once again, the Fed indicated it would let short-term rates remain low for the foreseeable future.

The Financial Engines Perspective

As we look back on 2014, it might be difficult to make sense of an unpredictable year in world financial markets. You might ask, if the S&P 500 did so well, why it makes sense to diversify into foreign equities?

The answer lies in the unpredictable nature of financial markets. It is remarkably hard to guess which asset classes will do best in the months ahead. Time and experience have shown the best strategy is to diversify your portfolio to cushion the impact of unexpected market shifts. We will continue to closely monitor markets to keep your portfolio on track.

Financial Engines investment advisors are available to answer any questions about your retirement strategy. Give us a call at (866) 303-3809 to receive personalized advice based on your unique situation.

Financial Engines Market Watch Q3: A Jittery End to September

The third quarter saw a mix of solid equity markets punctuated by periods of downside volatility in early August and again at the end of September.

Despite the downturns, the S&P 500 set new all-time highs during August and September. By the end of Q3, the S&P 500 index of large cap stocks had gained a modest 1.1%. In contrast, stocks in the S&P Small Cap 600 index had a rough quarter. Smaller company stocks peaked at the beginning of the quarter and steadily lost ground dropping 6.7% by the end of Q3.

With continuing tensions abroad and weak growth in Europe, the MSCI Europe, Australasia, and Far East (EAFE) index lost 5.9% in the third quarter. Emerging markets did well through most of the quarter, but fell sharply in the last two weeks of September to end with a loss.

Interest rates fluctuated during the quarter, ending mostly lower. The Barclays U.S. Aggregate Bond index gained 0.2% in the third quarter, bringing the year-to-date gain to 4.1%. Bond markets continue to benefit from a consensus view that interest rates will remain low for the foreseeable future.

The Financial Engines Perspective

U.S. employment and economic growth has been strong which has added to investor confidence. However, many investors remain nervous about stock market valuations and potential future changes in Fed policy. Add to that continuing strife in the Middle East and protests in Hong Kong which have dampened foreign stock market returns.

In times of such volatility, it is important to remain appropriately diversified. Don’t fall into the trap of trying to outguess the market. Our models closely monitor changing market conditions to keep your portfolio on track. Financial Engines investment advisors are available to answer any questions about your retirement strategy. If you are a Financial Engines customer, you can call an Advisor Representative at (888) 443-8577.

© 2014 Financial Engines. All rights reserved. This publication is for informational purposes only and does not constitute investment advice or an offer to buy or sell any security. Future market movements may differ significantly from the expectations expressed herein, and past performance is no guarantee of future results. Financial Engines assumes no liability in connection with the use of the information and makes no warranties as to accuracy or completeness. Future results are not guaranteed by any party. Financial Engines® is a trademark of Financial Engines, Inc. All other intellectual property belongs to their respective owners. Index data is derived from information provided by Standard and Poor’s, Barclays Indices, and MSCI. The S&P 500 index and the S&P SmallCap 600 Index are proprietary to and are calculated, distributed and marketed by S&P Opco, LLC (a subsidiary of S&P Dow Jones Indices LLC), its affiliates and/or its licensors and has been licensed for use. S&P®, S&P 500® and S&P SmallCap 600®, among other famous marks, are registered trademarks of Standard & Poor’s Financial Services LLC, and Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC. © 2014 S&P Dow Jones Indices LLC, its affiliates and/or its licensors. All rights reserved. Source: MSCI. The MSCI information may only be used for your internal use, may not be reproduced or disseminated in any form and may not be used to create any financial instruments or products or any indices. The MSCI information is provided on an “as is” basis and the user of this information assumes the entire risk of any use made of this information. MSCI, each of its affiliates and each other person involved in or related to compiling, computing or creating any MSCI information (collectively, the “MSCI Parties”) expressly disclaims all warranties (including, without limitation, any warranties of originality, accuracy, completeness, timeliness, non-infringement, merchantability and fitness for a particular purpose) with respect to this information. Without limiting any of the foregoing, in no event shall any MSCI Party have any liability for any direct, indirect, special, incidental, punitive, consequential (including, without limitation, lost profits) or any other damages.