Q3 2018 Returns By Asset Class

For the last several 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 2018 for those of you that are interested (see below).

2018Q3 Asset Class Performance

A few call-outs from the data:

  • US stocks, especially large caps (+7.6%), led the way in Q3, with small caps a bit behind them (+4.9%).  International developed markets were slightly positive (+1.3%), with emerging markets lagging (-1.7% for both stocks and local currency bonds).  Commodities were the worst performers (-2.5%) for the quarter.  US aggregate and short-term corporate bonds finished around the flat-line, despite another hike in interest rates by the Fed (rising rates are a short-term negative for fixed rate bond funds because their value falls, though as those bonds mature, they are replaced with new bonds that pay a higher rate which makes that a long-term positive).  Overall, most diversified portfolios saw gains of a couple of percentage points with more aggressive allocations (more stocks) seeing a slightly more gains and more conservative (more bonds) being closer to flat on the quarter.
  • Over the last year, there is a wide divergence between the performance of US stocks, both large and small caps, and the rest of the world.  While it’s impossible to know the exact cause, we suspect it’s because the US tax cuts (corporate and individual) are providing a stimulus here that simply isn’t present around the globe.  The boost from those tax cuts and some deregulation has offset the negative impact of rising rates and economic uncertainty caused by building trade wars.  In other parts of the world, especially emerging markets, trade tensions and rising US rates are putting pressure on currencies and bloated budget deficits, leading to even more political instability which feeds a vicious cycle (Turkey, Argentina, etc.).  Valuations fully reflect this though, with emerging markets being the far cheapest equity asset class and fairly cheap by historical standards, and US large cap (especially growth) stocks, being the most expensive and fairly expensive by historical standards.   As I said last quarter, while everyone would love to see all asset classes moving up, a well functioning market has some dispersion in asset class performance.  The fact that US stocks can rise while emerging markets fall is a sign (at least for now) that a 2008-like meltdown is probably not on the horizon.
  • The Fed raised rates again in Q2 at their September meeting, continuing the once-per-quarter hike trend that they’ve set for the market.  The Fed Funds rate target is now 2.00-2.25%.  Futures markets show the market expecting the Fed to stay on that course for most of the next year, with an ~80% chance of one more hike this year and about a 50-50 chance of rates approaching 3% a year from now.  While increasing rates put pressure on bond prices, the advantage of shorter term bond funds is that they mature quickly and are replaced by new, higher paying bonds.  As a result, floating-rate bond funds are now yielding over 2%, with both US aggregate bonds and short-term US corporate bonds in the 3.25-3.50% range.  Emerging market bonds (in local currency) are now yielding over 7%.
  • Not much has changed from last quarter’s 5-year chart.  Commodities are still deep in the red due to big losses in 2014 and 2015.  US stocks continue to be the outperformers, with rest of the world lagging behind and trying to play catch up.  US stocks also continue to be the most expensive from a valuation perspective, with the rest of the globe, and especially emerging markets, looking cheap.
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Q1 2018 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 Q1 2018 for those of you that are interested (see below).  Note that there is no year-to-date chart in this quarter since year-to-date and last quarter are the same.

2018Q1 Asset Class Performance

A few callouts from the data:

  • Most asset classes finished Q1 down between 0.5% and 1.5%.  This is a far cry from “Markets In Turmoil”, as CNBC likes to call it whenever stocks move down for a few days in a row, but it is still the first down quarter in a long time.  The standouts on both sides of the flat line were Emerging Market Bonds (+~4%), Emerging Market Stocks (+~2.5%) and US Real Estate Investment Trusts (REITS) (-~8%).
  • All asset classes other than REITs remain positive over the last 12 months, led by Emerging Markets and Foreign Developed Markets.  As I’ve pointed out quite a few times in the last few years (and as can be seen on the 5-year chart), foreign stocks a have a lot of catching up to do vs. US stocks from a performance perspective.  Of course there’s no way to know whether they will catch up with the US or if there’s good reason for their underperformance.  At least over the last year, a bit of catch-up has occurred.
  • After smooth sailing in 2017, volatility returned for Q1 2018.  You’ll notice a lot more ups and downs on the 12-month chart over the last 3 months.  What feels like a bit of a roller coaster over the last few months is actually much more normal from a historical perspective than 2017 was.
  • Bonds (short and medium term) are still up slightly over the last 12 months despite another interest rate hike by the Fed.  The Fed Funds rate target is now 1.50-1.75%.  Futures markets are pricing in another two Fed rate hikes in 2018, with about a 30% chance of three more hikes.

Q4 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 Q4 2017 for those of you that are interested (see below).  Note that there is no year-to-date chart in this quarter since year-to-date and last twelve months are the same.  Instead, I just included one Full-Year 2017 chart.

2017Q4 Asset Class Performance

A few callouts from the data:

  • All asset classes displayed finished positive for 2017.  International markets led the way with emerging markets up 33% and developed foreign markets up 28%.  About 10% of this gain, is due strictly to currency fluctuations as the US Dollar finally took a breather vs. most foreign currencies in 2017.  That makes foreign holdings worth more in US dollars and juices returns a bit, offsetting some of the dollar gains / foreign losses in recent years.  Local currency emerging market bonds were up 15% for the year, due in part to the same currency impact.  As can be seen on the 5-year chart, foreign markets have a lot more catching up to do vs. the US, though there’s no way to know when that’s going to happen, or if the gap gets wider before it eventually starts to narrow.
  • US stocks continued their solid run with large caps up ~22% and small caps up ~17% on the year.  While those numbers aren’t extraordinary from a historical perspective, the lack of volatility was.  For the first time in the history of the S&P 500, all twelve months of the year had positive returns.  Don’t expect that to happen again, but if you think 20%+ returns usually means no chance of good returns the following year, you’d be mistaken.  The S&P 500 was up 20%+ 18 times since 1950 and in 16 of those times, the following year was higher (per LPL Research).
  • Bonds (short and medium term) had another positive year despite three more interest rate hikes by the Fed.  The Fed Funds rate target is now 1.25-1.50%.
  • Commodities (energy, metals, agricultural products) finished the year positive and are up substantially from their bottom in early 2016.  However, the oil crash really took its toll and as such, aggregate commodity funds are still down ~40% over the last 5 years.

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.

Q2 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 Q2 2017 for those of you that are interested (see below).

Q2 2017 Asset Class Returns

A few callouts from the data:

· Most asset classes finished Q2 between +1.5% and +3.5%. The standout to the positive side was Foreign Developed markets (+6.4%) and the standout to the negative side was Commodities (-3.7% even after a fairly strong comeback in the last week and a half of the quarter) due mostly to falling energy prices. If there’s ever an asset class about which we should be ok with falling prices, it’s commodities. Lower gas prices, lower heating costs in the winter, and lower raw material costs for manufacturers combined with lower transportation costs, tends to keep consumer prices overall from rising too quickly.

· Year-to-date, Foreign Developed and Foreign Emerging markets are the strong winners, both up ~15%. Emerging market bonds have done really well too, up nearly 10%. These are also three of the asset classes that under-performed for much of the last 5 years and are finally starting to catch up to the US stock market.

· Despite the Federal reserve hike in short-term rates in June, the third hike since December, aggregate bonds and short-term bonds had (slightly) positive Q2 and year-to-date. Higher 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.

· The chart of the last 12 months really shows how diverse return have been across asset classes. Commodities have lagged badly, Real Estate Investment Trusts (REITs) have been slightly negative, US bonds have been about flat, Emerging markets bonds decently positive, High Yield bonds even better, and US Large, US Small, Foreign Developed, and Foreign Emerging markets doing well (thought the US outperformed in 2016 and it’s Foreign markets that have been getting it done so far this year). A portfolio that mixes all these asset classes together, all of which have positive expected returns for the long-term future, but none of which perform in lock step with each other, will have a positive long-term expected return as well, but with a much smoother ride than any individual asset class. This is the power of diversification.

· 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 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. I’m confident the tide will turn eventually and foreign markets will outperform their US 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.

Q1 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 (minus the year-to-date since it is the same as the last quarter in this case) as of the end of Q1 2017 for those of you that are interested (see below).

Q1 2017 Asset Class Returns

A few callouts from the data:

· After lagging in Q4, emerging market stocks, foreign developed market stocks, and emerging market bonds led the way in Q1. These are also three of the asset classes that have under-performed for much of the last 5 years.

· The only losing asset class during Q1 was Commodities (energy, metals, agricultural products). This is somewhat surprising given that inflation has started to pick up a bit, but the impact of the global oil glut outweighed U.S. general reflation.

· Despite the Federal reserve hike in short-term rates in March, the second hike since December, aggregate bonds and short-term bonds had (slightly) positive returns over the last quarter and the last year. Higher 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.

· All major asset classes remain positive over the last 12 months.

· Repeating from last 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 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. I’m confident the tide will turn eventually and foreign markets will outperform their US 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.

Q4 2016 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 (minus the year-to-date since it is the same as the last twelve months in this case) as of the end of Q4 2016 for those of you that are interested (see below).

Asset Class Returns

A few callouts from the data:

· While you’ve undoubtedly heard about the rally in stocks since the election, it’s easy to forget how poorly the quarter started in October, and easy to overlook that the rally didn’t extend to foreign stocks, in US-dollar terms, at all. Emerging markets suffered (threats of trade wars, tariffs, etc. don’t bode well for emerging markets that are big on manufacturing and cheap labor), and bonds suffered as well (forecasts for a stronger US economy, infrastructure spending, and tax cuts likely mean higher rates and higher inflation, which is bad for fixed income). Our clients’ portfolios have their stock allocation more heavily weighted toward US stocks, but the underperformance of foreign investments offset some of the growth in US stocks in Q4. Our clients’ portfolios have the bond allocation skewed toward short-maturities, which don’t react as poorly to increasing interest rates, and which reflect those higher rates in the future much more quickly than a portfolio of long-dated bonds would. Overall, the quarter had mixed results, but could have been far worse if we were more weighted toward foreign stocks and/or long-dated bonds.

· All major asset classes were positive for 2016 as a whole. That is a pretty big accomplishment considering where we were in mid-Feb (see 2016 chart). The best performers were US Small Cap stocks (we tilt portfolios toward Small Caps) which were up more than 18% on the year.

· 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 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. I’m confident the tide will turn eventually and foreign markets will outperform their US 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.