Time Flies When the Markets Rally

I don’t want to alarm you, but in case you haven’t noticed, there are only about 75 more days until Christmas, which means about 74 more shopping days! As they say, time seems to pass more quickly every year, and this year is certainly no exception. It’s hard to believe that we just ended the third quarter of 2017.

The end of a quarter means that we get the quarterly scorecards that show us how our investments are doing. As someone in the investment management business, I certainly find these scorecards interesting, even though I know that over the long term, what happened in the last three months really doesn’t mean much. But that doesn’t stop us from wanting to know. So, in this week’s post, we’ll take a look at the markets and how they’ve done so far in 2017.

It seems like all that we’ve heard from the business news shows this year is that “stocks had another positive day, setting a new all-time record.” Despite all that is going on in the world, the markets keep going up. Nothing seems to be able to stop them. We’ve had the experts predicting that interest rates would rise for several years, and now the Fed has a plan to trim its balance sheet. It hasn’t hurt the markets. The political nastiness, uncertainty, and lack of legislative progress on policy issues like health care or tax reform haven’t hurt the markets. The geopolitical threat that is North Korea hasn’t hurt the markets.

If things don’t change in the final months of the year, 2017 might be remembered as the year when the stock market sleepwalked its way to new highs. It’s not just the lack of a big sell-off that is surprising; it’s also the lack of volatility. So far this year, the S&P 500 has registered a daily move of 1% in either direction only eight times. The last time we’ve seen so few moves of any significance was 1972.

Maybe it’s just a great reminder that the markets always defy expectations. “The experts” called for a sell-off if Donald Trump were elected last year. As is usually the case, the markets did the opposite of what the experts predicted: They rallied. The markets also rallied after the experts predicted that there would be a sell-off if the President’s political agenda failed to materialize. So far, the attempts at health care and tax reform have been disasters. The experts expected a sell-off; we got a rally. They keep talking about and predicting the upcoming sell-off; we keep rallying.

There are good reasons for the rally in stocks. The gross domestic product for the U.S. grew 3.1% in the second quarter, the strongest growth in two years. The earnings of the companies that make up the S&P 500 have grown more than 10% in each of the first two quarters and are expected to show good numbers for the third quarter. And, despite their threats to end the programs, the central banks around the world have maintained easy monetary policies, which make stocks look more attractive.

While we can certainly enjoy the continued growth in our investment accounts, we can’t fall into the trap that things will continue this way forever. We will eventually get the 10% correction that is normal (and healthy), and we will eventually get a major sell-off, caused by some unknown future shock. That’s just the way markets work.

So, enjoy the ride while it lasts, and make sure that your portfolio stays in balance. “Portfolio drift” can leave you overexposed to a particular asset class and make the pain of the downturn, when it eventually does appear, even more painful.

Now for that third quarter scorecard:

  • U.S. stocks gained 4.57% in the quarter, and have a total return of 13.91% year-to-date.

  • International developed stocks gained 5.62% for the quarter, and enjoy a gain of 19.96% so far this year.

  • Emerging markets stocks, last year’s worst-performing asset class, lead the way this year, up 7.89% for the quarter and 27.78% for the year.

  • Global real estate was slightly higher, gaining 1.13% for the quarter and 4.86% year-to-date.

  • Bonds were flat, as they have been for a while. For the quarter, S. bonds gained 0.85% and global bonds were up 0.70%. For the year, they are up 3.14% and 6.25% respectively.

It’s important to remember that we have no way of forecasting which asset class is going to outperform or underperform. If you’ve been to my office, you know that the crystal ball on my table, while pretty, is not functional. The best way to win at the investing game is to diversify your portfolio by asset class, control costs, and stay disciplined over the years. Don’t let the emotions of fear or greed affect your investment decisions. Not easy, but oh so important!

Returns above based upon the following:

  • U.S. stocks: Russell 3000 Index

  • International developed stocks: MSCI World ex-USA Index

  • Emerging markets stocks: MSCI Emerging Markets Index

  • Global real estate: S&P Global REIT Index

  • U.S. bonds: Barclays US Aggregate Bond Index

  • Global bonds: Citi WGBI ex-USA 1-30 years