Fall 2019 Market CommentarySubmitted by Affiance Financial on October 8th, 2019
From October 1, 1999 to September 30, 2009, a period of ten years, the S&P 500 had an annualized return of –0.2% (this includes dividends reinvested). Emerging markets had an annualized return of 11.7%. Fast forward a decade to the next set of ten year returns from October 1, 2009 to September 30, 2019. During these last ten years, the annualized return of the S&P 500 was 13.2%, while the ten year annualized return of emerging markets was just 3.7%.
The point of this comparison is not to predict the next ten years. Rather, it is to note that past performance is not a predictor of future returns and thus is not a reliable indicator for future investment. Our financial plans are designed for decades, but for some, success is measured in months or even less. This can lead to investment decisions based on recent market performance and most often does not end well. Volatility in stocks is expected and unpredictable. It is time in the market, not market timing that tends to be the most successful strategy for investors.
For that reason, we continue to believe that having a robust diversified global portfolio with many different asset classes is one of the cornerstones of a successful financial plan. Per Jonathan Clements, “Diversification isn’t just a defense against our own lack of clairvoyance. It’s also a way to buy ourselves a little more patience, so we’re more likely to stick with the laggards — and be there to make money when they finally return to favor.”
Bonds have had a stellar year with long bonds outpacing equities and posting current gains in excess of 20%. They have also tended to move inversely from stocks during periods of market stress, providing the desired cushioning effect when stocks decline. We continue to recommend bonds as an integral part of a globally balanced diversified portfolio.
This year’s strong bond returns have come at a price – declining yields. Unfortunately, the math for new bond purchases can be unforgiving. As an example, assuming a 5% annual interest rate, an investor can double their money in a little over 14 years. Assuming an annual interest rate of 1.63% (the 10 year treasury rate as of October 1), it will take close to 43 years to double your money! The long term implications of lower rates means that going forward, bond investors will either need to increase their savings, delay withdrawals, decrease future withdrawal amounts, or search elsewhere for higher returns. The danger with searching elsewhere for greater returns is the increased risk associated with those returns.
Currently, we are witnessing the Federal Reserve battle to stave off a slowing economy as evidenced by a recent decline in manufacturing. So far this year, the Federal Reserve has lowered interest rates twice and may do so again in order for the economy to continue growing. Our motto for the last ten years has been “Don’t fight the Fed.” Our continued belief is that the economy continues to grow, but likely at a more tepid rate of 2% or less. We believe that interest rates will be slightly more volatile, but that the long term direction for interest rates continues to be headed lower. As such, we strongly believe that the best strategy remains sticking with your long term plan especially during periods of market uncertainty.
As always, we continue to be loyal stewards of the money you have worked so hard to earn.
The views represented in this commentary are not meant to be construed as advice, testimonial or condemnation of any specific sector or holding. Investors cannot invest directly in an index. Unmanaged indexes do not reflect management fees and transaction costs that are associated with some investments. Past performance is no guarantee of future results. To discuss any matters in more detail, please contact your financial advisor.