The S&P 500 has moved over 20% since July 2009, the equivalent of two good years in the stock market. Call today to see if you need to rebalance.
Once again, all asset classes in the table below were positive for the 4th quarter though more muted than the substantial 3rd quarter rally. In our last update we posited, “While this market action is encouraging, it should not make investors more comfortable about probable returns from this point forward. That is not to say that stocks need to fall in value, but simply that future returns from this point are necessarily less than they were at lower valuations at the start of the last two quarters.”
|Money Market (Cash-Current Yield)||0.04%||0.53%||3.25%||3.03%|
|S&P 500 Index (U.S. Large Cap)||6.04%||26.46%||0.42%||-0.95%|
|Russell 1000 (U.S. Large Cap)||6.07%||28.43%||0.79%||-0.49%|
|Russell 2000 (U.S. Small Cap)||3.87%||27.17%||0.51%||3.51%|
|MSCI EAFE (International)||2.18%||31.78%||3.54%||1.17%|
|FTSE All-World ex-US (International)||3.71%||43.00%||6.80%||3.51%|
|Wilshire REIT (Real Estate)||9.15%||28.60%||-0.05%||10.68%|
|Barclay’s Capital U.S. Aggregate Bond||0.20%||5.93%||4.97%||6.33%|
We are more convinced of this today than we were when we originally made this comment a few short months ago. While economic fundamentals continue to slowly improve, market valuations continued to rise at a faster pace than the economic improvement. Looking back at the last ten years, many have argued that the worst decade in two centuries for U.S. stocks must necessarily be followed by a very positive decade. While we believe that the next ten years have a good chance to do better than the last (lets all hope returns will at least be positive), there is enough reason to believe that stocks could struggle to reach historical average returns of 10% to 11%.
Much economic uncertainty remains. One major trend that has come from the recent financial crisis is a much greater influence of government on the economy. Unfortunately, this makes prognostication much more difficult. Our primary concern with this trend is that elected officials tend to be driven by short-term motivations which often lead to a mantra of “short-term gain despite long-term pain.” The desire to get reelected too often leads to promising more than can be delivered in a fiscally responsible manner. The refusal to address known future catastrophes (i.e. Medicare and Social Security liabilities) or implement appropriate regulations is driven by the desire to maintain power. This inevitably leads to issues only being addressed at the crisis point – often met with reactionary rather than thoughtful policies that address root causes and consider unintended consequences. One need not look far into political history to see that this issue is not party specific.
The increased political influence and uncertainty is in addition to known current issues that we expect to remain trends for the coming decade – namely high unemployment, slow consumer spending growth, and limited wage growth. On the immediate horizon is our expectation of more foreclosures and continued pressure on home prices. We have detailed our concerns with these areas in most of our previous updates.
What Does This Mean For You?
We have no new brilliance to impart for you this quarter, but we cannot emphasize enough our belief that: “[Market] timing is not necessary for long-term financial and investment success. What is necessary is a disciplined plan driven by your needs and goals. The role of an advisor is to help you maintain the discipline through violent market swings and rebalancing as needed.”
“The future is quite murky and it could be a very bumpy, long road ahead. Whether deflation, inflation, or high sustained levels of unemployment are on the horizon, Buy and Hold investing is by no means dead. Diversification continues to be the best way to reduce volatility in a portfolio, though expanding beyond traditional stock and bond investment options may be necessary to achieve a smoother ride. Diligently rebalancing on a regular basis (once or twice a year) or following significant market movements in either direction (over a shorter period of time) is a critical component of managing your finances in the challenging years ahead.”