Q3 2017 Returns By Asset Class

For the last few quarters, I’ve posted returns by asset class (by representative ETF), as well as year-to-date, last twelve months, and last five years. While there is still no predictive power in this data, I updated those charts as of the end of Q3 2017 for those of you that are interested (see below).

2017Q3 Asset Class Performance

A few callouts from the data:

· All major asset classes finished Q3 positive, with the standout being Emerging Market Stocks at +8%. Foreign Developed Stocks were up ~5.5% with US Large Cap and Small Cap stocks up ~4.5% each. Emerging Market Bonds were up ~3%, Commodities (led by a bounce back in oil) up ~2.5%, High Yield Bonds up ~1.5%, and Real Estate Investment Trusts, US Aggregate Bonds, and US Short-Term Bonds all up 0.5-1%.

· While everything other than Commodities has been up year-to-date, Foreign Developed and Foreign Emerging markets are the strong winners, up 20% and 23% respectively. Both continue to play catch-up vs. the US stock market after under-performing significantly since the financial crisis (and even over the past 5 years, see the 5-year chart for more detail).

· Bonds (short & medium term) continue to perform, despite being in the midst of a Federal Reserve rate hike cycle. As I indicated last quarter, higher interest rates generally mean lower prices for bonds, but this is offset somewhat by the interest (which increases with higher rates) that those bonds pay. As long as rates don’t spike quickly, and as long as we stay away from long-term bonds (we do), bonds will continue to do fine and will continue to add a cushion to overall portfolios.

· After stagnating from 2014 thru late 2016, global stocks have been on a tear over the last 12 months. US and Foreign, Small and Large are all up 17-19% with virtually no corrections along the way. This will not continue forever. I promise that stocks will fall again in the future. They will of course rise again too, but prepare yourself for lower or negative returns at some point. It’s my nature to remind clients of the bad times during the good times and vice versa. Times have been very good recently.

· Repeating from last quarter as I know not all of you have the time to read this each quarter… On the five-year chart, you can clearly see the marked underperformance of foreign stocks (developed and emerging markets), emerging market bonds, and most notably, commodities (everyone remembers the massive declines in energy prices back in 2015). While commodities have bounced back slightly after bottoming in early 2016, they have a long way to go to regain their highs, and that is a very good thing for worldwide consumers (though not so good for oil-producing / oil-exporting countries). The underperformance of international markets can be viewed in one of three ways: 1) international stocks are now dirt cheap as compared to US stocks, OR 2) international economies are doing much more poorly than the US economy and therefore, due to limited future growth, their stock markets have fairly performed much more poorly than US stocks OR 3) some combination of the two. There is no way to know the answer, so we will remain diversified and will continue to include foreign stocks at a ratio of about 1:2 vs. US stocks in most portfolios. Note that this has really paid off over the last 9 months as indicated in the 2nd bullet point above. Foreign markets will sometimes outperform their US counterparts and US markets will sometimes outperform their foreign counterparts. We just can’t know when it will happen and so instead of trying to pick winners or losers, we believe it makes more sense to invest globally and be confident that population growth + productivity growth + inflation will result in nominal growth on average across all geographies and that in turn will result in long-term growth for a globally diversified portfolio of stocks.

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