The major stock market averages in the U.S. continued to make new highs throughout most of the 3rd quarter, only to reverse course in September. Still, despite declining about 5% since its September 2nd record, the S&P 500 eked out a very modest quarterly gain of 0.58%. Small-caps, which tend to be more volatile, were down for the quarter, with the Russell 2000 returning -4.36%. Both large- and small-caps in the U.S. are still enjoying double-digit gains year-to-date.
In international markets, the developed markets, as measured by EAFE, were very slightly negative, with a -0.35% return, but emerging markets, which, like small caps, tend to be more volatile, were down more sharply, roughly -8%. EAFE is up nearly 9% year-to-date, and emerging markets are now slightly negative on the year.
The Barclays Aggregate Bond Index was very nearly flat for the quarter and is slightly negative year-to-date.
Overall, our typical client portfolios were slightly negative for the quarter, primarily due to the weakness in small-caps highlighted above.
And yet, in spite of our long-held belief that we are in a “low-return world,” stocks, particularly here in the U.S., continue to deliver above-average returns. Historically, long periods of above-average performance tend to be followed by long periods of below-average performance. We expect that trend to continue. And considering we are still enjoying what has been a prolonged period of above-average performance, we continue to think it’s prudent to expect lower returns going forward.
With markets, and therefore portfolios, still very near all-time highs, expectations for lower returns, and no shortage of things to worry about, we understandably get questions along the lines of “should we be taking some money off the table?” Well, the answer to that question is highly personal and depends on factors ranging from risk tolerance to age to withdrawal needs. There is nothing wrong with maintaining enough in cash to fund short- to intermediate-term spending needs. But for your long-term investment portfolio, the answer is no.
Whether your portfolio allocation is all equities, or a conservative mix of stocks and bonds, the best course of action, assuming your long-term strategic allocation is still appropriate to your circumstances, is to stick to your planned allocation, and rebalance to it periodically. But timing the market never pays off. While this concept is well-established, we’ve seen recent research that further supports it. In a nutshell, the cost of missing upward moves tends to be greater than the cost of staying in through downturns. Consider this staggering statistic: since 1999, if you had just missed the top 10 trading days for the S&P 500, you would’ve enjoyed less than half of the return over the last 20+ years. Missed the top 25 days? You would’ve missed out on more than three-quarters of the market’s gain! And it’s worth noting, these days tend to follow the worst days. In fact, 21 of the 25 worst days since 1999 were followed, within a month, by one of the best 25 trading days.
Our prescription for the market conditions, as we perceive them, remains much the same. Either directly or through mutual funds, own a carefully selected portfolio of high-quality companies that are competitively advantaged, financially sound, well-managed and reasonably valued, diversified by size and geography. That approach has served us well for many decades and through a variety of bull and bear markets.
Finally, as always, we encourage you to make sure we have your most updated personal information, including address, employment/retirement status, phone numbers, including mobile, and preferred email addresses. And feel free to reach out to your advisor with any questions, concerns or change of circumstance that might help us serve you better.