Global investment markets continued to climb in the third quarter. International stocks extended their performance lead year-to-date (spurred by the weak U.S. dollar). U.S. stock indexes marked new all-time highs, led by technology and health care companies. Bonds were positive, moving even many globally balanced portfolios into double-figure return territory year-to-date.
|Index (as of 9-30-2017)||3rd Qtr 2017||1 year||3 years (avg. annual)|
|S&P 500 (large U.S. stocks)||4.5%||18.6%||10.8%|
|Russell 2000 (small U.S. companies)||5.7%||20.7%||12.2%|
|MSCI EAFE (foreign developed market stocks)||5.5%||19.7%||5.5%|
|MSCI Emerging Markets (foreign stocks)||8.0%||22.9%||5.3%|
|Bloomberg Barclays U.S. Aggregate Bond||0.9%||0.1%||2.7%|
|NAREIT Equity REIT (commercial real estate)||0.9%||0.7%||9.9%|
|Morningstar Conservative Blend (20% stocks)||1.8%||3.6%||3.2%|
|Morningstar Moderately Conservative Blend (40% stocks)||2.6%||7.3%||4.8%|
|Morningstar Moderate Blend (60% stocks)||3.4%||11.0%||6.0%|
|Morningstar Moderately Aggressive Blend (80% stocks)||4.2%||14.9%||7.2%|
|Morningstar Aggressive Blend (100% stocks)||4.9%||17.8%||8.2%|
Total returns including reinvested dividends
- The U.S. stock market posted a positive monthly return for the 11th consecutive month. There have been only three longer streaks – 12 months in 1936 and 1950 and 15 months in 1959.
- Positive returns have been largely uninterrupted. Year-to-date, the S&P 500’s largest decline has been 3%. Since 1980, only one other year (1995) has had such a small intra-year maximum decline. Twenty one of those 38 years had intra-year declines greater than 10%.
- If you had invested in the S&P 500 at the end of October 2007 peak and held on through 2008-09 until now, total return (including dividends) would have crossed 100% in September. Even investing right before an epic downturn, you still would have doubled your money. In that same time, the U.S. bond market (Bloomberg Barclays Aggregate Index) returned 50%.
- Warren Buffett proclaimed that the Dow Jones Industrial Average (Dow) will hit 1,000,000 in 100 years. (It closed September at 22,405.) It’s not an outlandish prediction. It requires only a 4% annual compounded return to pass 1,000,000 in 2117.
What we’re watching:
- International stock returns have been boosted by the declining value of the U.S. dollar throughout this year. Currency impact is cyclical, and what is currently a contributor to international returns could become less so. That doesn’t mean we should exit international investments. Foreign stocks are still less expensive than U.S. stocks.
- Real estate investment trusts (REITs) have had a difficult time relative to other market sectors. This is particularly true for U.S. and retail REITs. New research suggests that the diversification benefits of REITs, compared to stocks or bonds, are lessening. We will gauge the impact of REITs in clients’ portfolios more closely and, if necessary, make adjustments.
- Tax reform is likely to remain a key topic in Washington D.C. We don’t expect anything to be finalized before year end, but changes in the tax code could be beneficial for stock ownership if corporations benefit from lower tax bills. This could be a sufficient catalyst for continued price gains in U.S. stocks.
- U.S. economic growth picked up the pace through the summer and even after the impact of hurricanes, the index of leading economic indicators projects continued growth in the near term. Historically, this index provides some advanced notice by turning downward prior to broader evidence of decline in economic output.
- The Federal Reserve has no precedent for its action to reverse much of the quantitative easing that has supported the economy and stocks for several years. Given the likelihood of a new Federal Reserve chairperson, the central focus will be on interest rates and their impact on markets, inflation, the economy. Based on futures markets trading, there is a 70% chance the Fed will raise interest rates again in December.
- Increased volatility is overdue. Year-to-date, only 5% of all trading days have experienced a move in the S&P 500 of +/-1%. This is the lowest level of volatility since 1982 when intra-day records began.
We will continue to monitor your portfolio considering your time horizon, risk tolerance and risk capacity. If you expect to have expenses in the next year that will require withdrawals from your Schwab accounts, that money should be removed from stock market exposure.
If you have questions about your investments, please let us know.
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