If you believe that the trend is your friend, then perhaps the U.S. stock market is in for an excellent fourth quarter. U.S. equity markets suffered small losses in the first quarter, followed by decent single-digit gains in the second quarter. Now that the third quarter is in the books, a somewhat larger gain has put U.S. stocks in solid positive territory for the year.
The ACWI (all country world index) was up 4.28% for the quarter which is a solid return. International stocks, although up .76% for the quarter, are still in negative territory for the year by a measure of -3.76% as measured by MSCI EAFE.
While at first glance it looks like stock markets are just moving in lock step in the US, if you take a deeper look you will find that growth type companies (largely technology) have led the way and are outperforming their value counterparts (financials etc) by a wide margin. It isn’t unusual to have these gaps from time to time but the leadership of growth and value companies does change over time. It is with this in mind that your portfolios are diversified and own both types of companies. This will tend to smooth out the investor’s experience over the long haul.
In the bond markets, coupon rates on 10-year Treasury bonds have continued an incremental rise to a 3.06% annual coupon rate, while the yields on 30-year government bond yields have risen slightly to 3.21%. Short-term yields are catching up; 3-month Treasury bills are now paying investors 2.20%, and one-year Treasuries yield 2.56% on a flattening yield curve. Typically, bond investors demand to be paid much more to hold longer-term paper, due to the always-present uncertainties in interest rate movements and other factors.
Five-year municipal bonds are yielding, on average, 2.23% a year, while 30-year munis are yielding 3.26% on average.
What’s going on? The American economy is continuing to expand with GDP at the highest level in years and corporate earning at record levels over time. It is widely understood that growth of stock prices follow growth of earnings but not always in lockstep.
These aren’t your normal market predictions of how the U.S. or International stock will perform over the next week, month, quarter or even year. These are the types of market movements you have to weather in order to achieve your long term objectives.
- Stock markets on average have had a 10% inter-year drop every year since 1926. It is about as predictable as the sun coming up yet everyone will be “surprised” the next time.
- Your average stock market return will not come in a straight line and in fact very rarely are your calendar returns equal or close to your long term average. Returns are lumpy and not predictable.
- You will be challenged emotionally to maintain your position in stocks or to not chase the returns of the part of the markets that has worked best over the last quarter or year.
The approach we take with clients is to match the allocation of portfolios to the goals they are trying to achieve. We don’t predict markets but we make reasonable calculated adjustments to protect client assets and take advantage of the inevitable market movements.
As always we value and appreciate the trust you have placed with us over the years and we will continue to commit all of our resources with the goal of providing great client experiences and great client outcomes.
Shone Asset Management