4th Quarter 2019 Market Commentary
The investment markets certainly know how to close out a decade in style. Just as 2009 ended the first decade of the 2000’s with strong performance across asset classes, 2019 ended the most recent decade the same way. The chart to the right offers a breakdown of how various asset classes performed in 2019.
The first thing you might notice about this chart is that every single asset class finished the year in positive territory! While the magnitude of those returns varied across asset classes, it was a great year overall in the markets. Large Cap US Stocks and Real Estate continued to lead the way in 2019 with returns over 25%. Despite continued worries about the global economy, international stocks also posted strong returns of 18% in emerging markets and over 21% in developed markets. For the first time in years, commodities and gold both posted strong returns of around 17%. Bonds were the weakest performers, but even they managed to earn almost 15% for US corporate bonds and almost 9% for US government bonds.
While it would be nice to sit back and simply enjoy these stellar returns, it’s important to keep things in perspective. Anytime we look at return numbers you have to consider the start and end date, because any slight change to those numbers could significantly change the results. Remember, just as asset classes were positive across the board in 2019, they were negative across the board in the 4th quarter of 2018. That means our starting point on January 1, 2019, was much lower than the starting point from just a few months earlier.
As an example, if we look at 15 month returns, with a start date of October 1, 2018, we include the market downturn in the 4th quarter of 2018. Here’s a sampling of what those returns would look like, compared to the 2019 returns:
1/1/19 - 12/31/19
10/1/18 - 12/31/19
Small Cap US Stocks
Emerging Market Stocks
US Real Estate
Granted, many of these asset class returns still look very good, and most investors would and should be happy with performance like this in an average year. The point is not to diminish the strong performance we’ve seen recently, but merely to provide some perspective by zooming out beyond the 12 month calendar year.
While we often emphasize the need to take a longer-term perspective, this extends beyond just looking at 12 month, 3 year or even 5 year returns. The end of the decade provides an opportunity to take this longer-term perspective and again illustrates the need to consider start and end dates for performance figures. The most recent decade was much better than the first decade of the century, so here’s what annualized returns look like for certain asset classes if we just look back over both decades, and if we look at the last 20 years in total:
Small Cap US Stocks
US Real Estate
As you can see, stocks really struggled for the entire decade of the 2000’s (often called “the lost decade”), but did very well in the 2010’s. Commodities did very well in the 2000’s but posted a negative annualized return for the decade of the 2010’s. Bonds were pretty steady throughout both decades as interest rates declined.
The point in this analysis is not to show how great the most recent decade was in stocks, nor how awful the prior decade was in stocks. The goal is simply to remind ourselves that starting and ending dates matter, whether we are looking at 12 month, 10 year or even 20 year returns! We must always be sure we keep things in perspective and not overreact to what just happened in the markets.
While it’s important to not overreact to short-term returns, it’s even more important to view returns through the lens of your financial plan and your long-term financial goals. If you know what kind of returns you need to earn over the long-term to reach your goals, you can better frame the impact of past returns. You can’t control what the markets do, but you can control your savings and spending rates. If we go through a period of poor returns, maybe you have to try to increase your savings to get your plan back on track. If returns have been very strong, maybe you will be able to reach your goals sooner than you’d hoped.
Gaining perspective helps you stay focused on what’s important in your own finances, but it also helps focus on what’s important in the broader world. From the continued trade war with China to the escalating tensions between the US and Iran to the raging wildfires across Australia, there is no shortage of scary headlines that draw our focus. These are important stories that will impact millions of people and are deserving of attention. But we can’t lose sight of all the good happening in the world today and the incredible progress we’ve made in recent years.
As Morgan Housel so eloquently puts it in this article looking back on the past 38 years, “progress happens too slowly to notice while setbacks happen too quickly to overlook. There are many overnight tragedies. There are no overnight miracles”. The world is most certainly a better place now than it was 10 or 20 years ago. If you don’t believe me, just read this article from Matt Ridley, aptly titled “We’ve just had the best decade in human history. Seriously”.
Next time you start to worry about the markets, the economy or the future in general, try to step back, take a different perspective and make sure you are focused on what’s important.
-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.
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