Welcome to the 2Q19 and 2019 YTD review.
For a detail look at the market in 2Q19, please review our full market analysis by clicking the picture below:
Let's check out the high points!
A look at equities:
- The S&P 500 posted its best first half in 22 years.
- Key headlines:
- Interest rates: Expected dovish tone by Fed to help cushion slowdown has helped markets.
- US-China Trade talks: Tough talk and tit-for-tat tariffs already causing slowdown – conflict will be challenge to fully resolve, temporary trade truces notwithstanding.
- Possible economic slowdown: Rate of growth slowing as cycle ages and benefits of tax reform rolls off.
- 2020 Election headlines start to emerge: First Democratic debates set the tone.
- Key headlines:
- Equity markets around the globe posted positive returns for the quarter and YTD. Looking at broad market indices, US equities outperformed Non-US developed and Emerging Markets during the quarter. The Global Market (MSCI All Country World Index – gross dividends) was up 3.8% in 2Q and is up 16.6% YTD (gross dividends). This index is the benchmark Alison Wealth Management uses to assess their globally diversified portfolios.
- In 2Q Value stocks outperformed growth stocks in Emerging markets , but underperformed in developed markets, including the US. YTD, Value is trailing growth by over 500 bps in the US, over 800 bps in Developed Markets, and 300 bps in Emerging Markets (gross dividends).
- Small caps underperformed large caps in all regions in 2Q by about 150-250 bps; and by about. YTD large is beating small by 200-400 bps (gross dividends).
- After a very strong 1Q, REIT indices underperformed equity market indices in both the US and non-US developed markets. YTD US RETS are up 16.7% and Global ex US REITS are up 14.7%.
- US equities, which were up 4.1% in 2Q19 and are up 18.7% YTD; outperformed both non-US developed, which were up 4.1% in 2Q and 15.1% YTD; and emerging markets equities, which were up 0.7% in 2Q and 10.8% YTD (gross dividends).
- In 2Q Small caps underperformed large caps in the US and YTD Small Caps are trailing Large by almost 200 bps (gross dividends).
- Value underperformed growth in the US across large and small cap stocks. YTD, Value is beating growth by over 500 bps in the US (gross dividends).
- In US dollar terms, developed markets stocks outside the US outperformed emerging markets equities but underperformed the US equity market during the quarter.
- Small caps underperformed large caps in non-US developed markets.
- Value underperformed growth across large and small cap stocks.
- In US dollar terms, emerging markets underperformed developed markets, including the US.
- Value stocks generally outperformed growth stocks.
- Small caps underperformed large caps.
- In US dollar terms, Switzerland and Germany recorded the highest country performance in developed markets, while Hong Kong and Japan posted the lowest returns for the quarter. There was a wide dispersion in returns across emerging markets. Greece recorded the highest country performance with a gain of 23%, while Pakistan posted the lowest performance, declining 21%.
- In both developed and emerging markets, currencies were mixed against the US dollar.
- Non-US real estate investment trusts outperformed US REITs in US dollar terms.
A look at Fixed Income/Rates:
- Interest rates decreased in the US Treasury fixed income market during the second quarter. The yield on the 5-year Treasury note declined by 47 basis points (bps), ending at 1.76%. The yield on the 10-year Treasury note fell by 41 bps to 2.00%. The 30-year Treasury bond yield decreased by 29 bps to finish at 2.52%.
- On the short end of the curve, the 1-month Treasury bill yield decreased to 2.18%, while the 1-year T-bill yield decreased by 48 bps to 1.92%. The 2-year T-note yield finished at 1.75%, decreasing 52 bps.
- In terms of total returns, short-term corporate bonds increased by 2.09%. Intermediate-term corporate bonds had a total return of 3.13%.
- The total return for short-term municipal bonds was 1.12%, while intermediate munis returned 1.98%. Revenue bonds outperformed general obligation bonds.
- Interest rates in the global developed markets generally decreased during the quarter.
- Longer-term bonds generally outperformed shorter-term bonds in global developed markets.
- Short- and intermediate-term nominal interest rates were negative in Germany and Japan.
- These portfolios illustrate the performance of different global stock/bond mixes and highlight the benefits of diversification. Mixes with larger allocations to stocks are considered riskier but have higher expected returns over time.
From a Historical Perspective:
The US stock market has delivered an average annual return of around 10% since 1926. But short-term results may vary, and in any given period stock returns can be positive, negative, or flat. When setting expectations, it’s helpful to see the range of outcomes experienced by investors historically. The S&P 500 Index had a return within this range +/- 2 percentage points in only six of the past 93 calendar years. In most years, the index’s return was outside of the range—often above or below by a wide margin—with no obvious pattern. For investors, the data highlight the importance of looking beyond average returns and being aware of the range of potential outcomes.
Exhibit 1 shows calendar year returns for the S&P 500 Index since 1926. The shaded band marks the historical average of 10%, plus or minus 2 percentage points. The S&P 500 Index had a return within this range in only six of the past 93 calendar years. In most years, the index’s return was outside of the range—often above or below by a wide margin—with no obvious pattern. For investors, the data highlight the importance of looking beyond average returns and being aware of the range of potential outcomes.
Exhibit 1. S&P 500 Index Annual Returns from 1926–2018
In US dollars. S&P data © S&P Dow Jones Indices LLC, a division of S&P Global. Indices are not available for direct investment. Index returns are not representative of actual portfolios and do not reflect costs and fees associated with an actual investment. Past performance is no guarantee of future results. Actual returns may be lower.
TUNING IN TO DIFFERENT FREQUENCIES
Despite the year-to-year volatility, investors can potentially increase their chances of having a positive outcome by maintaining a long-term focus. Exhibit 2 documents the historical frequency of positive returns over rolling periods of one, five, and 10 years in the US market. The data show that, while positive performance is never assured, investors’ odds improve over longer time horizons.
While some investors might find it easy to stay the course in years with above average returns, periods of disappointing results may test an investor’s faith in equity markets. Being aware of the range of potential outcomes can help investors remain disciplined, which in the long term can increase the odds of a successful investment experience. What can help investors endure the ups and downs? While there is no silver bullet, understanding how markets work and trusting market prices are good starting points. An asset allocation that aligns with personal risk tolerances and investment goals is also valuable. By thoughtfully considering these and other issues, investors may be better prepared to stay focused on their long-term goals during different market environments.
Exhibit 2. Frequency of Positive Returns in the S&P 500 Index
Overlapping Periods: 1926–2018In US dollars. From January 1926–December 2018, there are 997 overlapping 10-year periods, 1,057 overlapping 5-year periods, and 1,105 overlapping 1-year periods. The first period starts in January 1926, the second period starts in February 1926, the third in March 1926, and so on. S&P data © S&P Dow Jones Indices LLC, a division of S&P Global. Indices are not available for direct investment. Index returns are not representative of actual portfolios and do not reflect costs and fees associated with an actual investment. Past performance is no guarantee of future results. Actual returns may be lower.
Source: Dimensional Fund Advisors LP. There is no guarantee investment strategies will be successful. Investing involves risks, including possible loss of principal. Diversification does not eliminate the risk of market loss. All expressions of opinion are subject to change. This article is distributed for informational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services.