First Half of 2017 Market Recap

2017 is more than half over now, and a lot has happened.  In case you haven’t heard, international stocks are killing it.  The Matson Money International Fund is up almost 14% through the first half of the year.   The following is commentary from Matson Money on the 2nd quarter in the markets.

The 2nd quarter of 2017 saw a continued increase in broad equity markets, both at home and internationally. During this time period, U.S. stocks grew by 3.09% as represented by the S&P 500 index, and for a second consecutive  quarter, international stocks fared even better, with the MSCI EAFE index  returning 6.37% for the quarter. After lagging behind for much of the previous couple of years, Emerging Market stocks once again led the way over  developed markets for the 2nd consecutive quarter. The MSCI Emerging Markets Index saw a return of 6.38% for the quarter, and is now up over 18%  year to date.

Over the course of the last year, we’ve seen strong market returns, the  lowest unemployment numbers we’ve seen in recent history, and continued low interest rates and low inflation. By almost any normal metric the economy  is looking very healthy and has for quite some time. During extended time  periods of good economic data and favorable stock returns, investors can sometimes begin to feel euphoric – like things will stay good forever. In fact,  over the last 18 fiscal quarters, the S&P 500 had a positive return in 17 of them, with only one negative return in the 3rd quarter of 2015.

In times when markets are down and seem as if they are never coming back up, we stress  that it’s extremely important not to lose sight of one’s long term goals, not  to panic, and to use downside volatility as an opportunity to rebalance and buy  more equities. These same principles apply during bull markets as well. That  euphoric feeling that investors can feel when it seems like markets will go up  forever can lead to imprudent decisions in the same way fear can in a down  market. Investors tend to overestimate their aversity to risk in these market  conditions and take on greater exposure to equities than their true risk tolerance would dictate. In both scenarios, it is important to not get caught up  in recency bias – assuming that whatever is happening in the short term will persist into the long term. Short term trends are just that – short term.  Throughout the life of the stock market bull markets have been followed by bear markets and vice versa many times over.

It is an important distinction to understand the difference between academically proven ways in which  markets move as compared to short term trends. Over the long term, equities have outperformed risk free investments such as treasury bills, but this is not going to be true over every short time period. Similarly, small stocks and value stocks have outperformed large stocks and growth stocks respectively, but again, this isn’t necessarily true over the short term. In fact, looking back historically, sometimes investors have had to wait many years before these  various premiums have shown up, but the prudent investor who understood  that these premiums are pervasive in the long term and have ignored short  term trends have very often been rewarded for doing so. That is why it is so  important to own a diversified portfolio built specifically for your personal risk  tolerance, to stay prudent and to keep that portfolio through the ups and  downs of the market, and to rebalance when the opportunity presents itself.

In the end, choosing a wise financial strategy – and sticking to it – can have  tremendous impact on an investor’s long term financial health. Chasing  performance through buying and selling is a risky game. Historically speaking,  it will only reduce an investor’s real return. Relying on unbiased, non-emotional advice from a trusted investor coach to make good decisions can help an investor bridge that gap between what the average investor makes  and the return of the market.

By Jimmy Hancock

References

  1. 2017 Happy New Year Sign. Digital image. Vectoropenstock.com. N.p., n.d. Web. 25 July 2017.
  2. Matson Money. “Account Statement.” Letter to James Hancock. 20 Apr. 2017. MS.

1st Quarter Stock Market Recap

1st quarter returnsIf you pay attention to any financial media you probably assumed 2016 has been a horrible year for stocks so far, but you would be wrong.  Although it wasn’t a great quarter for stocks, The Free Market US Equity portfolio (Diversified US Mix) was in the positive by just over 1%.  Bonds were slightly better as the Free Market Fixed Income portfolio returned almost 2%.  1
The following is an excerpt from Matson Money’s Quarterly Statement with analysis on the market.
 
“2016 started out with brand new fears of a bear market taking hold after a steep decline in the stock market occurred over the first few weeks of the new year. After only 5 trading days, the U.S. stocks were down almost 6%, and by early February they were down as much as 11%, as measured by the S&P 500 Index. While this may have seemed perilous at the time, those investors that did not act hastily and react to this short term downturn saw the remainder of the quarter recoup all of that lost return and then some; the S&P 500 ended up 1.35% for the quarter. The renaissance wasn’t limited to U.S. stocks, however. After lagging behind last year and getting off to a rocky start in 2016, emerging market stocks shot up late in the quarter, with the MSCI Emerging Markets Index finishing up 5.75% for the quarter.
 
There was a common perception among investors and those in the media that a precipitous drop like the one that occurred to start the year was a harbinger for the rest of the year or even multiple years to come. This discourse can lead investors to have fear and trepidation about how their investment portfolios might weather such a storm. If one is operating under these assumptions, it is only natural for their gut instinct to tell them to panic and make potentially harmful decisions regarding their portfolio.
 
While many believe during a decline that the market will be slow to recover, history tells quite a different story. According to an article by Paul Lim in the NY Times, for the 60+ year period from 1946-2007 the average recovery for a stock market decline between 10% – 20% was only 111 days, meaning the market had fully recouped the losses in just over 3 months.  Even for bear markets where stocks sustained losses of more than 20%, the recovery time was still under 2 years.
 
For those preaching fear over a negative January being an omen for a bad remainder of the year, consider that the S&P  has dropped by at least 2% in January 24 times since 1926, and of those years, the average return over the remaining 11 months was +7.6%. Unfortunately, it appears that many investors out there may not have had the benefit of an advisor coach to keep them disciplined. By in large, investors were fleeing out of the market, as evidenced by $41 Billion of outflows from mutual funds worldwide in January according to ICI data.
 
In the end, choosing a wise financial strategy -and sticking to it -can have tremendous impact on an investor’s long term financial health. Chasing performance through buying and selling is a risky game. Historically speaking, it will only reduce an investor’s real return. Relying on unbiased, non-emotional advice from a trusted investor coach to make good  decisions can help an investor bridge that gap between what the average investor makes and the return of the market.” 1
 
By Jimmy Hancock
 
References
 1. Matson Money. “Account Statement.” Letter to James Hancock. 17 Apr. 2016. MS. N.p.