As the third quarter of 2016 draws to a close, we are enjoying a second quarter in a row of strong stock market returns despite the retreat of a few categories in the past 30 days. Large-cap US stocks have been the strong performing category for most of the last 8 years to the extent that occasionally we have clients question the benefit of including foreign or small-cap holdings in their portfolio! Interestingly, in 2009 when the S&P 500 (large-cap US stock index) finished the year with a 10-year average loss of -1%, while a well-diversified portfolio of stocks including foreign and small-cap finished with a 10-year average gain of 6%, investors were saying the same thing, except this time questioning the value of holding US large-cap stocks! So far in 2016 the trend has changed. We are finally seeing category returns for emerging markets, value, and small-cap stocks surge ahead. Year-to-date, US value stocks (all cap sizes) with returns of 6%-10% are outperforming growth stocks with returns of 2%-6%. Despite the bad news occurring a year ago in those regions, emerging market stocks have returned 12% so far this year. Real estate, one of last year’s top performing categories, is showing moderate returns in the 6%-7% range. Bonds have done well in all categories, with the high-risk bond categories such as long-term bonds and high-yield bonds sporting returns over 10%, and low-risk bond categories, such as short-term and government bonds returning 1%-2%.
Some investors have been questioning whether to change investment strategy based upon which presidential candidate takes office. In fact, many have been wondering whether to change strategy just based on the craziness of this election! Oppenheimer offered a fun graphic (https://www.oppenheimerfunds.com/investors/election-2016) which shows that since 1952, if you invested $10,000 in the DJIA in only Republican-led years, you would have $58k, if you invested the same in only Democrat-led years you would have $120k. (To be fair, you would have done better in Republican-led years until 2008), but the big win was to invest consistently through all administrations, because then you would have amassed $693k! The bottom line is that politics and investing don’t mix, so ignore the political environment in relation to your investment strategy. That being said, the US is still in one of the longest economic expansions since the Great Depression and, no doubt, coming closer to the end of a business cycle and a recession. Stock market volatility will only be increasing. This is a good time to make sure that your asset allocation, especially your stock-to-bond ratio, is in line with your goals. If you are getting closer to retirement or making work optional, know that it’s “a win” if you sell stocks and increase bonds when the stock market is hitting highs!