Unless you live under a rock, you couldn’t help but notice that the US equity market has taken a beating in the last few weeks. As of this writing, the S&P 500 (total return) Index is down 8% in the last month and 5% year-to-date. The hardest hit stocks have been the previously market leading tech stocks with the loftiest (most optimistic) valuations. Value stocks have fared somewhat better.
Will There be a Recession?
Many economists view the new administration’s policies; particularly tariffs – and the resulting trade war – as well as government layoffs to be recessionary. Even the President has admitted the possibility; but suggests it will all be worth it in the long run. This is all highly uncertain. And only time will tell.
Greed & Fear
Historical stock market returns represent a perfect example of the “flaw of averages.” While the long term historical average is approximately 10% per year. It is almost never anywhere near 10%. You have a good number of 15 – 25% yearly gains and a similar number of yearly losses – that all average out to that 10% gain over time. It’s like walking into a room filled with only giants and midgets; in which the average height is 6 feet tall – but nobody in the room is 6 feet tall.
On the upside, markets are moved by investors wanting to continue their good fortune. On the downside markets are dominated by fear of what is going to happen next. There’s even an index to measure these two emotional drivers. And it’s currently flashing red.
But these signals can turn on a dime. And it is nearly impossible obtain the average return without experiencing – and withstanding – the ongoing volatilty. So it is crucial to try to manage your own emotions as we navigate these highly uncertain times.
International Diversification
Interestingly, while US markets have tumbled, international markets have shown positive returns; demonstrating the (at least occasional) value of global diversification. International stocks are off to their best start to a year in a quarter century.
Bonds Rally
In yet another benefit to diversification, bonds have have rallied as they typically do when stocks sell off. There’s been an interesting see-saw effect going on in the bond market. Fears of renewed inflation would tend to make interest rates rise and bond prices, therefore, to fall. On the other hand, if we are truly heading to a recession, the Fed is likely to lower rates faster than the market expects. This tension may take a good while for it to resolve.
New Film — Tune Out the Noise
It is most definitely a time to be paying attention to what is going on. But there is no way to predict with any precision how this is going to play out. Good investment strategies anticipate these kinds of periods; whether they are caused by housing busts (2008), pandemics (2022) or shifting political winds.
Our good friends at Dimensional Funds picked a perfect time for the public release of this 90-minute film (you can skip the ads) documenting the founding of the firm and the forward thinking, hard-working (and future Nobel Prize winning) academics who were instrumental in developing and applying research that showed how rules-based, broadly diversified portfolios could lower barriers to entry and reduce costs for investors. This new approach, which stood in stark contrast to the stock-picking and performance-chasing tactics that predominated, led to the invention of index funds, the founding of Dimensional, and the evolution of client-focused advice.
We have been strongly influenced by these practices in developing our clients’ investment strategies. Hopefully, viewing this film will make you feel a bit better about your globally diversified portfolio investment experience.
