If you’ve looked at your investment statements lately, you might see zig-zag returns in the Quarter to Date (QTD), Year to Date (YTD) and one-year investment categories, reflecting the daily volatility of our market. The last quarter closed at a loss for most, but not all indices. However, the losses in Q3 were not significant enough to wipe out gains year-to-date, given the strong market performance in Q2 of this year. Stretching further, one-year portfolio returns incorporate the losses of 17.5% in the tech heavy Nasdaq or 13.97% in the broader S&P 500 during Q4 2018.[i] Where the market will go in the final quarter of the year is impossible to guess.
During this last quarter, the Wilshire 5000 Total Market index, the broadest measure of the U.S. stock market, posted a gain of 1.23%. For the year, the Wilshire 5000 posted a gain of 20.11%, and in a one-year window, total return dropped to 2.95%.[ii] Examining the market by asset class sectors, the Wilshire U.S. Large Cap was up 1.53% QTD, up 20.56% YTD and also up in the one-year category at 4.05%. The theoretically low correlation small cap category had a loss of 1.76% QTD, a gain of 15.78% YTD and a loss of 6.99% in a one-year window, exemplifying the zig-zagging market returns above.[iii]
International markets had difficulty, dealing with slower growth in Germany and unceasing Brexiety (anxiety about Brexit). The MSCI EAFE (Europe, Australasia, and Far East) index which measures international market returns posted a loss of 1.71% QTD, a gain of 9.85% YTD and a loss of 4.27% over a one-year period.[iv] Rounding out a diversified portfolio, Emerging Markets lost 5.11% and Real Estate gained 7.88% during the last quarter.[v]
Finally, let’s examine bonds. This time last year, people were saying bond rates had nowhere to go but up. To everyone’s surprise, the Fed cut interest rates twice in 2019, is predicted to cut interest rates again in Q3, and possibly once more in Q4 to close out the year. At the end of the last quarter, 10-year Treasury Bonds were yielding 1.68% compared to 3.05% at the same period in 2018.[vi] Municipal bond returns were also low, yielding about 1.28% in the Five-Year Muni category.[vii]
The good thing about a diversified portfolio is that you never have all your eggs in one basket. If one asset class is falling or not performing as predicted, another asset class is likely gaining in value and typically when it’s least expected. Each asset class has its day in the sun. Because it’s nearly impossible to determine the exact timing of strong performance, sticking to an asset allocation target that matches your risk tolerance pays off in the end, especially in a volatile market.
Big factors that could affect the market are the U.S. and China trade war and now the U.S. and Europe trade war. With the holiday season fast approaching, tariffs on imported/exported goods may affect consumer spending which would directly affect corporate profits and further the stock valuation in the equity market. Further, election years typically bring about volatility as active traders try to align money with the agendas of the predicted political party to take power. Brexit, has been factored into the market already. Historically, impeachment proceedings/actions do little to hinder the market from moving in the direction the economy was already heading. However, it does make for interesting headlines in the news.
The slowing U.S. economy signals a market contraction may be coming. However, indicators of a more severe recession are not present at this time. Typically, to have a recession, the economy would show signs of high unemployment, high inflation, and negative corporate profits; none of which have been seen to date. In fact, unemployment is at a 50-year low and consumer spending was up 4.6% compared to the same period last year. Q2 earnings by corporations also showed an increase of 3.8% (Q3 earnings have yet to be released). [viii]
If a market contraction does take hold, economists predict it will be short-lived and could run its course in 18 months. Historically bull markets are long, while bear markets are swift. If history were to repeat itself, the best action might be not to react to a short-term blip in an otherwise healthy market. If you feel your portfolio could use review to prepare for the market to come, reach out to your Certified Financial Planner™ for a second opinion. Then do your best to stay the course in the choppy market to come.