Record is our word of the quarter. It describes the first quarter of 2019 and the fourth quarter of 2018, both of which were historically extraordinary performance quarters for the stock market, both up and down. The word record may also describe Modera Wealth Management because we often sound like a broken one when we say: “Stick with your financial plan, and do not try to time the stock market.” These past two quarters are prime examples of why we have always advocated this long-term perspective. With that said, there seems to be two overarching themes to the first quarter: one being the dramatic rebound in the equity markets, and the second being the interest-rate environment.
Theme 1: Equity Markets
Let’s look at the quarterly numbers and also the longer-term picture. The stock market collapse experienced during the fourth quarter of 2018 led to the worst annual performance for stocks since the financial crisis. However, the S&P 500 finished the first quarter of 2019 up 13.7%, after being down 13.5% in the fourth quarter of 2018 and more than erasing the full-year losses during all of 2018.
As the chart shows on the prior page, riding out short-term market volatility proved to be a wise strategy.
International stock markets also rebounded during the first quarter, with both developed and emerging markets bouncing by 10.1% and 10.0%, respectively (as represented by the MSCI EAFE and MSCI EM Emerging Markets indices). Bond prices also improved in the first quarter as high-quality bonds and corporate high yield bonds rebounded 2.9% and 7.3%, respectively. (see our discussion of the yield curve below for more detail).
Data Ending 3/31/2019 (not annualized if less than 1 year)
|Equities Indices||Q1 2019||1 year||3 years||5 years||10 years|
|MSCI ACWI (All Country World)||12.3%||3.2%||11.3%||7.0%||12.6%|
|S&P 500 (U.S. Large Cap)||13.7%||9.5%||13.5%||10.9%||15.9%|
|Russell 2000 (U.S. Small Cap)||14.6%||2.1%||12.9%||7.1%||15.4%|
|MSCI EAFE (International Developed)||10.1%||-3.2%||7.8%||2.8%||9.5%|
|MSCI EM Emerging Markets (International Emerging)||10.0%||-7.1%||11.1%||4.1%||9.3%|
|Fixed Income Indices|
|FTSE World Government Bond Hedged (Global Bonds)||2.7%||4.8%||2.5%||3.7%||3.6%|
|Barclays U.S. Aggregate (U.S. Investment Grade Bonds)||2.9%||4.5%||2.0%||2.7%||3.8%|
|Barclays Municipal Bond 5Y (4 – 6) (Municipal Bonds)||2.1%||4.4%||1.8%||2.2%||3.1%|
|Barclays U.S. Corporate High Yield (U.S. High Yield)||7.3%||5.9%||8.6%||4.7%||11.3%|
|S&P Developed REIT (Global Real Estate)||14.6%||16.2%||5.9%||8.1%||16.4%|
|HFRI FOF: Conservative Index (Diversifiers)||2.8%||1.4%||3.4%||2.0%||3.3%|
Source: Zephyr Analytics & Morningstar
This is probably not the last time we will see short-term whip-saw investment performance. March 9, 2019 marked the 10th anniversary of the stock market bottom during the last financial crisis of 2007-2009. The decline from the highs back in 2007 to the market trough in 2009 was without a doubt unsettling. However, in the ensuing decade the stock market not only recouped all those financial crisis losses but has eclipsed to new all-time highs.
This longer-term resurgence in stock prices was not always smooth, yet was grounded in substantial positive changes including the following:
We have written multiple times, including last quarter, about the benefit of having a broadly diversified strategy for investing. This advice has proven to be beneficial not only in the past six months, but also, and more importantly, over the past 10 years.
Theme 2: The Yield Curve Has Changed
We have also written in the past about the Federal Reserve and the impact of interest rate changes on the bond market and investment portfolios. These past few months have seen significant changes in the Fed’s guidance, and it is worthwhile to revisit this theme again.
The yield curve represents a plot of all current U.S. Treasury yields, across various maturities and it has shifted significantly, becoming flatter over the past few years.
The Federal Reserve has been slowly raising short-term rates now that the economy is stronger, to counter rising inflation and to normalize the accommodative monetary policy during the financial crisis. At the same time short-term rates have risen, longer term rates have also declined. As a result, the yield curve has been slowing flattening and recently started to “invert” (meaning, some shorter-term interest rates are now above longer-term rates).
As has been reported in the news lately, and research has shown, an inverted yield curve has been a good predictor of future economic slowdowns. However, an inverted yield curve has also not been a consistent predictor of the future direction of stock prices. In fact, there have been several instances in history where the yield curve inverted, and the S&P 500 was meaningfully higher in the periods that followed.
We have taken some steps to counteract the impact of rising rates by maintaining a broadly diversified approach to the fixed-income portion of portfolios, using a mix of both U.S. and international bonds, municipals, and corporate bonds, for example. The duration of the fixed income allocation has been shorter than the Aggregate Bond Index and we have sought out higher-than-average yields to try to mitigate the impact of rising rates. The Aggregate Bond Index duration is 5.8 years and our average for fixed income is 5.0 years overall and 4.3 years for US bonds only.
One of our goals is to focus on helping our clients stay on track toward their specific financial long-term objectives. We will, of course, monitor short-term economic and market conditions and make periodic adjustments in our clients’ accounts where warranted. We like our record of sticking to the plan that we and our clients have set in motion over many years, and then striving to outperform over the longer-term through a well-diversified and risk-controlled approach to investing.
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