For Every Positive, There is a Negative - In the US, large cap stocks finished the quarter up close to 2%, but mid cap stocks were flat and small cap stocks lost about 2%. Outside of the US, developed market stocks were just barely negative but emerging market stocks were down over 4%. In commodities, gold posted a strong 4% return, but the broader commodity index lost 2%.
Falling Interest Rates Offer Short-Term Gains - In the bond market, the US Treasury 10-year yield fell from 2% to 1.5%, continuing the year’s rapid decline in interest rates. When interest rates fall, bond values rise, and the Barclays Aggregate Index was up over 2% on the quarter and is up over 8% this year. Declining interest rates also appear to be helping real estate, with REITs posting returns of almost 8% on the quarter and over 28% on the year.
Zoom Out For Better Results - Most asset classes still have positive returns for the year, with the S&P 500 up over 20%, the Russell 2000 up 14%, MSCI EAFE up 13%, MSCI Emerging Markets up 6%, REITs up 28% and the Barclays Aggregate up 8%. Even though much of those gains came during the first quarter, it’s hard to complain about a year where nearly every asset class is in positive territory through the end of September.
What did we learn?
What Goes Around Comes Around - It’s been a long time since value stocks outperformed growth stocks, but they finally showed signs of life this quarter. Large cap US value stocks outperformed US growth stocks by about 2% on the quarter. We saw the same outperformance for small cap value stocks vs small cap growth stocks. We’ve seen throughout history these two factors will outperform at different times. It’s too soon to say whether value stocks will continue to outperform but we also don’t believe the speculation that “value investing is dead”.
Cash is not the Answer - As interest rates were rising last year, high yield savings accounts kept pushing up their yields, making cash look much more attractive than it had in a long time. This year has seen a reversal of that trend with banks like Ally reducing the yield on their savings accounts from 2.2% earlier this year to 1.8% currently. While higher yields might have made cash feel like a better investment, the reality is that over time it’s impossible to keep up with inflation when holding too much in cash.
The Economy is Still Strong, But Might Be Slowing - By most measures the US economy remains on solid ground, particularly in the labor market, where unemployment remains low and wages are rising. There are some signs of a slowdown in economic growth in the US in recent weeks, which is one of the reasons cited by the Fed for lowering interest rates. Things don’t look quite as positive outside of the US, where global growth is slowing.
Where do we go from here?
“Things are going to get a bit bumpy up ahead, so we’ve turned on the fasten seatbelt sign”.
If you’ve spent any time on airplanes you’ve surely heard that warning from a pilot before. You know it means you are about to go through some turbulence but there’s no reason to worry about it. Sometimes they’ll even give you an estimate of how long the turbulence might last, or let you know they are headed down to a different altitude in search of smoother air. If not for this open communication, these moments would be scarier.
We were recently on a long flight home from Iceland that had been relatively smooth for almost 5 hours. Without warning we hit a rough patch of air, and the “fasten seatbelt” sign came on as the plane started to bounce around. The captain made an announcement that they’d try to find a smoother ride, but for the next 45 minutes or so the turbulence was pretty bad. We watched the little map on the screen in front of us as the plane made a left turn and veered off our original path searching for a better route.
My 6-year-old son was sitting next to me and this was his first time seeing such a long period of turbulence on a plane. He usually likes it when we hit a few bumps, pretending he’s on a roller coaster, but this time was different. He started to get scared and he clearly didn’t believe my assurances that this was completely normal. I’m sure in his mind he thought the plane was going to crash and the bumps would never end. He got sick to his stomach, but eventually, thankfully, fell asleep.
I tell this story not to imply the markets are headed for a bumpy period, although that is certainly possible. I tell this story because if we do go through a bumpy period, you should simply think of it as if you were on a plane that hit some turbulence. It might feel like the bumpiness will never stop and you might even fear the market will crash and never recover. But you know the market has been through rough periods before, just as you know every pilot has made it through some rough turbulence before. You know the market always recovers, just as you know you’ll eventually get to your destination.
In times of market turbulence, you might need someone sitting by your side, telling you this is all normal and not to panic, just as my 6-year-old did. You might also need a pilot to help you find a different route to your destination. That’s what we are here for. We might not be able to predict market turbulence in advance, but when it hits, we'll be there to help you through it.
-Chris Benson, CPA/PFS
The views expressed represent the opinions of L.K. Benson & Company and are subject to change. These views are not intended as a forecast, a guarantee of future results, investment recommendation, or an offer to buy or sell any securities. The information provided is of a general nature and should not be construed as investment advice or to provide any investment, tax, financial or legal advice or service to any person. Please see Additional Disclosures more information.