September ended the worst quarter for stocks in four years.

In the period July 1, 2015, to September 30, 2015, the S&P500 lost 6.9%.  The index closed the quarter at 1,920, almost the same place it was in May 2014.

All asset classes affected

Market turmoil led investors to move out of almost all asset classes.  Nervous investors preferred bonds to stocks.  Out of Municipal bonds, Taxable bonds, US stocks, and International stocks, Municipal bonds were the best performing, rising 1.3% in the quarter. Taxable bonds fared next best with a -1.4% return.

US stock funds, on average, declined 7.9% and the average International fund dropped 10%.  Large-cap stocks outperformed mid-caps and small-caps.

Sectors from real-estate to healthcare

The best performing sector within the stock market was real estate.

The worst was energy.

Healthcare normally is a defensive place to be. Yet, it performed poorly falling almost 14% in the quarter led down by the selling of biotech stocks. An observation with healthcare is that the Fidelity biotech fund was down almost 20% in the quarter which means that traditional healthcare like pharmaceuticals was thrown out with biotech.

Companies like big pharmaceuticals could be a buy.  In a time dominated by index and ETF investing, there can be opportunities if you dig through the detail.

A bias against indexing

The quarter, with its August 24th min-crash, showed investors that more than ever indexers, ETFs, and high-frequency traders are driving the broader markets.

As a stock-picker and follower of the principles of value investing, I know I have a bias against indexing.  But, I believe that the combination of index investing, ETFs, and high-frequency trading brings out the worst in momentum investing.  It can create a snowball that can move prices lower in a hurry without any consideration of the underlying fundamentals of individual stocks or the general market.

We are in a world of quick, powerful moves.  A strategy to take advantage of this needs to be developed.  I don’t have it figured out, however, it seems that the only way to navigate the volatility that can appear includes the following combination:

• Looking for stocks that have been unfairly trampled (the aforementioned healthcare example),
• Keeping cash on-hand to buy the fierce drops, and
• A commitment to patience and a long-term view

Don’t underestimate this bull market

Regardless of the poor performance and the downward pressures on the market, stocks did manage to re-group and bounce as the 3rd quarter ended.  In fact, last week was a strong one for stocks. This surprised many pundits.

At the end of the quarter, pessimism was high, as evidenced by mutual fund outflows and the voices talking “bear market”.

Maybe the bounce will prove to be short-lived, the result of an over-pessimistic market that was over-sold.  Time will tell.  I’ll caution the bears that this bull market has weathered a lot and to underestimate it has been a bad trade.

— Ian Green, Pendragon Capital Management

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Note: This blog article is intended for general informational purposes only. Nothing in it should be construed as, and may not be used in connection with, an offer to sell, or a solicitation of an offer to buy or hold, an interest in any security or investment product.