3 Observations on Q3 and Thinking Forward

Wednesday, October 18, 2017 |

Recapping what happened in Q2 with a focus on the quarters and years ahead:

  1. Bonds are up over 3% this year and had another positive quarter. Interest rates shot up around election time last year (causing bond prices to fall), but have since come down and appear range bound. The 10-Year Treasury is our interest rate bogey and the that rate range appears to be a low of around 2% and a high around 2.60%. The next move in rates could be when either end of the range is crossed first. There is precedence for stagnation in low rates. If we look at the 1940’s & 50’s, rates reached a low of 2% in 1940 and didn’t break 4% until 1959. If history repeats itself and we use 2012 as our low, we won’t get over 4% until 203
  2. The rally in stocks has not been confined to the US. As the above data table points out, International is leading our markets this year and had another solid quarter. The rallies across the globe have seemingly been justified by improving earnings, which have been moving in sync. The question of course is will this earnings growth continue to improve and will the subsequent estimates stay positive.

Source: The Daily Shot

  1. The US rally has continued to push valuations higher and forward returns lower. We have those projections around 6% annualized over the next decade. This is similar to other analyst’s projections, and most long-term valuation metrics show a richly priced but not parabolic market. While the return projection is higher than bonds, and can certainly surprise to the upside, it is below the historical norm (though I should note international return projections are higher). Investors are used to bull and bear markets that have dominated since the 80s; however, the 1970s was more a sideways market that led to below average returns. Thus, it’s possible either a sustained bear market at some point or just sideways trading for the next 10 years could get us to a market valuation closer to the historical average.

 


International investing involves special risks, including, but not limited to, currency fluctuations, economic instability, and political uncertainties, not typically present with domestic investments.

Morgan Stanley Capital International (MSCI) EAFE Index (Europe, Australasia and Far East) is an index created by Morgan Stanley Capital International (MSCI) that serves as a benchmark of the performance in major international equity markets as represented by major MSCI indexes from Europe, Australia and Southeast Asia.

The MSCI Emerging Markets Index is an index created by Morgan Stanley Capital International (MSCI) and is a float-adjusted market capitalization index that is designed to measure equity market performance in emerging markets. It consists of indices in 23 emerging market country indexes: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Peru, Philippines, Poland, Qatar, Russia, South Africa, Taiwan, Thailand, Turkey and Arab Emirates.

S&P 500 Index is an index of 500 of the largest exchange-traded stocks in the US from a broad range of industries whose collective performance mirrors the overall stock market.

Russel 2000 is an index that measures the performance of the small-cap segments of the US equity universe. It is a subset of the Russell 3000 and includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership.

Barclays U.S. Aggregate Bond Index is a composite of four major sub-indexes: US Government Index, US Credit Index, US Mortgage-Backed Securities Index, and US Asset-Based Securities Index, including securities that are of investment grade quality or better, have at least one year to maturity, and have an outstanding par value of at least $100 million.

The bond market is volatile and carries interest rate, inflation, liquidity and call risks. As interest rates rise, bond prices usually fall, and vice versa. Change in credit quality of the issuer may lead to default or lower security prices. Any bond sold or redeemed prior to maturity may be subject to loss.

Investors cannot invest directly in an index. Past performance is no guarantee of future results.