2017 Q3 Insights

October 26th, 2017 by John Anderson – Be the first to comment
Posted in Markets, Quarterly Insights


It’s getting hard to not feel as though I am writing the same thing about the markets each quarter.  In fact, the US markets have put together an impressive string of seven consecutive quarters of positive returns.  We have to go all the way back to the third and fourth quarters of 2015 to find any significant red (negative returns) across our asset class returns chart.  Major asset class returns for the third quarter and 2017 YTD are below.

Asset Class Representative Index Q3 2017 YTD
Global Equities MSCI All Country World Index 5.2% 17.3%
    U.S. Equities S&P 500 Total Return 4.5% 14.2%
    International Equities MSCI All Country Ex US 6.2% 21.3%
    Emerging Markets MSCI Emerging Markets 7.9% 27.8%
Real Assets Alerian MLP Total Return 0.0% -2.7%
    U.S. Real Estate Dow Jones US REIT 0.4% 1.8%
U.S. Bonds Barclays Aggregate Bond 0.9% 3.1%

Here in the US, small caps (Russell 2000 Index) lead the way after lagging much of the year turning in 5.7% for the quarter.  The S&P 500 continues to set new highs closing above 2,500 for the first time ever as the quarter drew to a close.  Globally, the world economies which had been even more sluggish than the US following the financial crisis continue to impress, turning in brow raising returns reminiscent of years past.  Developed markets delivered 6.2% for the quarter bringing in the YTD return to 21.3%.  The real star this year continues to be emerging markets up 7.9% for the third quarter and a commanding 27.8% return for the year.    Real assets, after being strong performers over the past couple of years have struggled remaining mostly flat for the year.

During their September meeting, the Federal Reserve chose not to raise rates stating the persistence of lower than desired inflation.  Ms. Yellen said that while the economy is strong, the low inflation is a cause for caution when raising rates.  As we’ve discussed, setting interest rate policy is one tool the Fed uses to help control the economy (lower them to get it going, raise them to cool it off).   The Fed planned on raising rates three times this year but has only followed through twice.  The persistence of ever-increasing interest rates has kept the bond markets subdued this year turning in 3.1% so far but on par with our expectation of a 4% return for the year.

While the Fed chose not to raise rates, or at least raise them at a slower pace, they did announce their decision to begin liquidating (selling) trillions of dollars of bonds they purchased during their quantitative easing efforts following the 2008 financial crisis.   It will take years to liquidate and I expect it will keep pressure on fixed income muting total returns.

Lessons from the Financial Crisis – 10 Years Later

Speaking of the Financial Crisis, as I write this, we are passing the 10-year anniversary of when, on October 9, 2007, the S&P 500 Index closed at what was then its highest point ever before losing more than half its value over the next year and a half!  It’s hard to believe it has been that long, but it has.

I am sure over the coming weeks and months, as other crisis-related events pass (like the 10 year anniversary of the fall of Lehman Brothers), there will likely be a steady stream of articles and stories reflecting on what happened.  Most will likely offer opinions on how the environment today may be similar or different from the time leading up to the crisis.   I would caution you that it is difficult to draw any useful conclusions based on such observations since markets have a habit of behaving unpredictably in the short run.

However, as our current bull market continues to run higher, I do believe there are some important lessons that we would be well-served to remember. First, markets have historically rewarded us for sticking with our investment plan over the long term.  Every dollar in your portfolio should be serving a useful purpose aimed at meeting your long-term goals.  Keeping your goals as the focus while using a properly allocated portfolio designed to help you meet them is one of the best ways to prepare for the next market downturn.

Benefits of Hindsight

In 2008 the stock market dropped in value by almost half.  Reading the news or opening up a quarterly statement made for stomach-churning experiences for many – especially those near retirement.  Being 10 years removed with the subsequent rebound and years of double-digit gains may make it a little easier to take it in stride.  But, while the crisis was unfolding a future like this was seemingly anything but certain.  Headlines such as “Worst Crisis Since ’30s, With No End Yet in Sight” were common front page news leading many to act on emotion and move their portfolios to cash.  However, doing so may have cost them dearly if the also missed the subsequent recovery.

Second, it’s important to remember that the 2008 crisis and the recovery that has followed are not the first time in history it has happened.  The chart above helps to illustrate this point.  It shows the performance of a balanced portfolio 1, 3, and 5 years following the most significant market downturns since 1987.  During a time of extreme financial uncertainty such as the one represented here, there are practically no safe havens, and even the best portfolios suffered loss.  But for those who could look past the short term, the markets did recover and their portfolios moved on to new heights.



Keeping Perspective

As the markets climb higher and we hear more and more about “impending doom”, remember these lessons from the crisis, stick with the plan we’ve crafted, and know we’ve prepared for both the good times and the bad.Finally, equity markets continue to be one of the best investments for growth.



The graph above shows the annual returns of the S&P 500 since 1926.  Over that time the index has averaged an impressive 10% return plus or minus 2%.  It’s important to note that in only 6 of the past 90 years has the index actually finished within that range (8% to 12%) – most of the time it was either above or below by a wide margin.  However, despite year-to-year uncertainties, as the chart indicates over 90% of the time the returns were positive rewarding a long-term perspective.

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Standard Disclosure:
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. Investing involves risk including loss of principal.