Lots of folks talking about how long-in-the-tooth is this bull market. Some conclude the end is near. Others see room to run. Regular readers hopefully can guess what we think. Regardless how one determines bull markets, neither its eventual length, nor the length and depth of the drawdown that succeeds it are determinable in advance. Calling a bull-run “old” gives it an unwarranted sell-by date. Implying there’s great room to run similarly disregards market unpredictability. Bull-market variables like duration and magnitude do not have natural ranges. Cyclical bull/bear outcomes are further examples of market randomness. Suggesting otherwise serves little good in assisting clients in their pursuit of financial goals.

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Fairly common to hear folks gabbing about how great a stock they own has performed. Common, too, having missed out on the run to the peak, the schadenfreude of those who avoided the downfall of former big winners. A recent example, we all might like to have seen our individual portfolios achieve gains like the shares in Facebook have seen since the company’s IPO in 2012. But, with this latest swoon yet another example, there’s been more than a bit of drama in the course the shares took to arrive at their current level. We think that’s true for all individual stocks and find that portfolio diversification in all its forms, while offering no guarantees, helps to avoid such duress.

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The second quarter proved mostly unexceptional. Sure, we could point to headlines and such, intimating at some connection between how markets reacted and reflecting on the performance of our models amidst those reactions. But, as we often note, such comments would be more conjecture than conviction. Besides, there really wasn’t much in the way of highlights (aside from one we’ll soon review). Although market volatility has risen, we might concede that markets are beginning to “work” in a manner more like that expressed in their pre-Financial Crisis past, a welcome return to ordinary.

Download PDF: Q218 SAM Market Review

We attempt as often as we can to resolve many of the mysteries surrounding investment management and our version of it. Not always an easy task, as popular culture has left many with impressions far removed from the normal day-to-day activities that comprise our work. Rare is the frantic emotion suggested by cable financial news. Even rarer is agitated activity. By design, our work focuses on the client, who in our view generally doesn’t benefit from any such bustle. Rather, our approach is founded on the idea that the client is best served when investing is approached with calmer hands and longer-term goals in mind.

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With the large-cap-stock focused S&P 500 Index now up 4.8% year-to-date, after its 21.8% jump in 2017 and its rarely interrupted run since the depths of the Great Recession, admonitions regarding the unsustainability of domestic equity market valuations are growing in number and volume. While we cannot argue statements of fact—that the immense gains have left U.S. markets nearly without precedent in regard to valuation—we can argue the implications. Certainly, there is meaning in stock valuations, and a present reading set against investment theory suggests future equity market returns may fall short of historical norms. Even so, the nature of market history suggests even more strongly that no metric, valuation-based or otherwise, can foretell future market movement. We thus continue to believe the best approach to managing exposure to market risk is one that focuses more on levels of market exposure appropriate for individual investment situations, rather than one that seeks to foretell and act in advance of market shifts.

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Fundamental to our approach to investment management is the acknowledgement that with most any increase in expected return, we also must expect an increase in risk. It is the balance between the two that we seek to match with client financial situations and goals. To help find that appropriate balance, we often turn to historical market data, which provide ample evidence for this simple rule. While we can’t be sure what the future will hold, we at least may seek to set proper expectations for what we might encounter. Such preparation we find goes a long way in supporting our endurance against whatever storms we may face and fostering our benefit from whatever good fortune markets may bring.

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Markets rose into the new year upon approval of sweeping tax reform in the U.S. Fortune turned in late January, though. Where investors once sought stronger inflation, it seems fears of too much of it saw perspectives flip. Compounding caution, increasingly contentious and sometimes erratic gestures from administrations around the globe left strategists warning of rising geopolitical tensions. Though the two forces had mixed effects on domestic bond prices, pressures from rising rates prevailed and fixed income returns were broadly negative in the quarter. Both trends lifted investor uncertainty to levels not seen in a few years, reminding many of the saw—past performance is not guaranteed—and leaving most segments of the equity universe in the red. Zooming out, equity investors may still find content in year-over-year gains easily in the double-digits, with now-higher yields potentially boosting bond returns going forward.

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With interest in and media coverage of investible markets so expansive, market volatility has become much more of a shared experience. Actual exposure to that volatility need not be. The design of our models acknowledges as much, with the range of exposures to investment risk they present offering flexibility to address specific needs of unique investors. While we utilize fixed income holdings to offset equity market risk, bonds are not without risks of their own. Still, the bond segments in which we invest generally are more stable than equity investments, offering the tools we seek to balance desired return with commensurate risk.

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More than a few folks are worried that interest rates are on the rise. Leaving aside the fact that rising rates generally are a signal of an improving economy, the concern may be warranted given the fact that bond prices generally fall as interest rates rise. Here as in so many other facets of investments, though, the perspective of time matters. As yields increase, we look to the potential for income from bonds to offset capital losses (as bond prices fall), a feature facilitated by the now higher yields on those bonds. Those concerned about the medium-term effects of higher rates on the bond portions of their portfolios may find some solace in this month’s review of past rising-rate periods.

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One of the several risk-oriented messages we hope has resonated with readers of our commentaries over the last year is that we have maintained a strong belief that the absence of volatility in equity markets did not in any way diminish the potential for volatility. Today’s turn of trend is a forceful reminder that markets can and likely will turn negative at times. These shifts can be abrupt, and they may arrive with no obvious catalysts. They may prove ephemeral or may herald a longer-term downtrend. Today’s result was quick to form, and we’ve read no singular explanation for its occasion. Unsettling for sure, it still was far from the worst seen in history. And though one may wish to turn and run for fear of more to come, it may not portend an extended decline. Longer-term goals perhaps better served, the plunge represents an opportunity for investors to revisit comfort with interim market losses via a discussion with a trusted advisor.

Download PDF: 020518 SAM Market Update