Is It Fall Yet?

Written by Chris Draughon

I want to see you achieve your financial goals so I spend my time making the complicated things simple. As the Director of Financial Planning I help our clients identify their most important financial goals and develop paths to get them there on time with room to spare.

October 5, 2018

It’s officially fall on the calendar, but hot humid summer weather persists here in Florida. It’s October, for Pete’s sake, and we’re left scratching our heads as to why we cannot sit outside and read the Sunday paper without a fan and a change of clothing.

Speaking of persisting, the pattern for various investments around the globe hasn’t changed much since the beginning of the year. In fact, the US stock market continues to be the only game in town compared to other investment classes around the globe. If you’re a diversified investor, you may be scratching your head as to why “the market” (defined by the news media as the S&P 500), continues to go up, yet your portfolio remains only modestly up for the year. In this commentary, we’ll answer that question and offer some cautionary advice about the future as well.

The chart below reflects the returns year-to-date versus last year for various investment classes around the globe. Take a moment to look at each one:

As noted earlier, you can see that US stocks have continued to perform well this year, but most other major investment classes are either down modestly or flat for the year. This leaves most diversified investors with modest gains compared to just the US market. (If you’re a diversified investor, you probably own all the categories on the chart in some amount.) But the chart tells us a little more than that.

First, let’s pretend it’s January 1, 2018. The new year is a blank slate. You review the 2017 returns as shown. Now, you are asked to predict which assets will do well and which will do poorly for 2018. Would you have filled in the blanks the way the year has played out? We doubt it. This reminds us that the future short-term direction of specific investment classes is completely unpredictable. (That’s why we own them all.)

Second, if International markets were outperforming US markets (like they did last year), you’d likely not notice it as much when reviewing your returns. Why? Because we all have a natural bias toward US investments. It’s all we hear about day in and day out. So naturally, we tend to compare our globally diversified portfolio results to “the market” (i.e., the US stock market), which is comparing apples-to-oranges. Make no mistake – every client owns the US market and is collecting US market returns – but it’s only one slice of your globally diversified pie. Being diversified means you’re never going to make a killing, but it also means you’re not going to get killed when the inevitable downturns show up.

Speaking of downturns, we are beginning to see some elements of US market performance that give us pause. Specifically:

  1. The S&P 500 is up around 11% this year, but the majority of that return has come from a small handful of stocks – not all 500. In fact, CNBC reported in July that only 3 stocks – Netflix, Amazon, and Microsoft – accounted for a staggering 71% of the S&P 500’s return.[1] This is hardly a broad-based rise in US large stocks, but outperformance of a noted few.
  2. US stock market valuations compared to International stocks are as wide as they’ve been since 2009 – when the recovery began. It’s difficult to imagine this gap is sustainable for very long. That means International stocks either must catch up, or US stocks must come back to earth. And since we don’t know which scenario will play out, investors need to own them both.
  3. The US stock market is now into its longest recovery on record without a meaningful correction. While this market advance could persist for a while with good economic news, trees do not grow to the sky. Sooner or later we’ll see a meaningful correction, and diversified investors will be rewarded for their patience.

In sum, we know that fall will ultimately arrive, and we’ll be rewarded with cool, crisp mornings to sit outside and sip coffee with the morning paper. We also know that sooner or later US markets will cool off. Investors have no more control over markets than they do the weather. Patience in both will reward us.

Come December, we’ll prepare our comprehensive, always insightful, “Year in Investing” review. Until then, stay cool and don’t hesitate to call us with any questions.

Your First Coast Wealth Advisors Team