For the first time since 2007, shorter-term yields on U.S. Treasury securities are higher than some of their longer-term counterparts, a phenomenon referred to as an inverted yield curve.
2019 has seen optimism spread to the capital markets with traditional asset classes all posting strong returns to start the year. As investors’ fears dissipate and we bask in the tremendous run that has marked the start of the year, let’s examine the role of high-quality fixed income in your portfolio as a tool to mitigate the effect of any equity volatility we will experience in the future.
The first quarter of 2018 was the first down quarter for US stocks since the third quarter of 2015. The 10 quarters since we’ve seen relatively steady growth. That relative calm has made the first quarter all the more jarring with multiple daily swings of 1% or greater.
With stocks hitting record highs nearly daily in January we heard from many investors that this couldn’t possibly continue. There was a fear that there would be a downturn. This time that sentiment proved to be correct.
It has been a fantastic year in the stock market – so far! This statement could be uttered by people all over the world in 2017.
In the US, stocks have gained 19.9% for the year through November. The average long tem rate of return for the US stock market has been 10% so the market is up nearly double the average. Stock market analysts at the major banks were calling for returns of about 6% before the year, well below actual results.
In international markets, after years of trailing US stocks, they broke out with a 24.5% return through November. Similarly, the long term return of international stocks has been about 10%, so again 2017 has blown past the historical average. Results were particularly impressive in emerging markets. After many analysts thought the asset class could show some growth entering 2017, emerging markets have been by far the best major asset class in 2017 soaring 32.8%.
Finally, fixed income has gained 3.1% for the year despite two Fed interest rate increases to date and likely a third this month. Interest rates, as measured by the 10 year Treasury yield, have instead come down over the course of the year. The yield started the year at 2.45% and is now at 2.33% (when yields fall, existing bond values climb). Again, the average projection by the major financial prognosticators was for bonds to post a negative return. They expected interest rates to rise with the 10 year Treasury yield at 3.0% at year end – substantially off from what occurred.
So how could so many analysts and economists have got it so wrong? The simple answer is, no one knows the future. Not even the top members of the field. This has proven out year after year. Sure, sometimes a market guru gets a call right and the press rushes to get more predictions. Meanwhile the many other inaccurate predictions drift form memory. This article does a good job of tackling how these predictions are covered.
What lies ahead for 2018? I advise against listening to the “experts” who are making their predictions now about the next hot asset class, or their year end target for the S&P 500. As you can see from the above, they were wrong by a wide margin this past year. Instead, the best course of action is to focus on your circumstances and whether or not there have been any changes that might drive a change in your portfolio. Has there been a change in time horizon for your portfolio or a change in risk tolerance? Is more/less cash needed throughout the year? While it may be tough to ignore the pundits in the financial press, concentrating on your own ability and willingness to take risk should be your main focus and let that drive changes in your investments. By remaining disciplined to your target asset allocation and only making adjustments if there have been changes in any of the above issues, it best positions you to achieve your financial goals.
|Index Performance||Nov.||YTD||Trl 1 Yr|
|US Stock (Russell 3000)||3.04%||19.93%||22.27%|
|Foreign Stock (FTSE AW ex US)||0.93%||24.54%||27.94%|
|Total US Bond Mkt. (BarCap Aggregate)||-0.13%||3.07%||3.21%|
|Short US Gov. Bonds (BarCap Gov 1-5 Yr)||-0.29%||0.70%||0.71%|
|Municipal Bonds (BarCap 1-10yr Muni)||-0.92%||2.83%||3.58%|
|Cash (ML 3Month T-Bill)||0.08%||0.74%||0.79%|
Photo courtesy Anthony Quintano.
Raffa Wealth Management is an independent investment advisor providing nonprofit organizations, high net-worth investors, and qualified retirement plans with a full range of investment consulting services. We were established to fill the need for transparency, clarity, and vision in the professional management of investment assets. Visit us at www.raffawealth.com
There is no guarantee that any investment strategy, including those described here, will be successful. Any investment or investment strategy can lose money. Past performance does not guarantee or predict future results. You should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Raffa Wealth Management, LLC. This information was gathered from reliable sources but we cannot guarantee accuracy. Indexes do not reflect the fees associated with actual investments and such fees would reduce the performance illustrated.