Q1 Asset Class Performance
The S&P 500 eked out a seemingly benign 1.4% return in the first quarter—an unremarkable result but a bumpy ride. This positive return came despite the “worst 10-day start to a calendar year ever,” and Q1 became the first quarter since 1933 to fall by as much as 10% and still finish with a positive return.
Top performing asset classes were long-term Treasury bonds, REITs (Real Estate Investment Trusts), and Emerging market stocks. Long-term Treasuries benefited from a decline in interest rates (bond prices move inverse to interest rates) and Emerging stocks returned nearly 6% despite being down 12.7% early in the quarter.
Commodities, International stocks, Managed futures and Small-cap stocks were all down in the quarter.
The bumpy ride in the first quarter highlights the importance of focusing on the long-term and sticking to your financial plan and investment strategy—disciplined investors who maintained their strategy over the quarter likely made money compared to double-digit losses for anyone that sold out near the lows.
Let’s take a look at why a deliberate investment approach is important and a factor that gets in the way.
Ben Graham, Warren Buffett's teacher, and mentor came up with an allegory that describes the sometimes fickle market behavior we witnessed last quarter.
In the allegory, a gentleman by the name or Mr. Market offers you a price each day for your business. But the problem is, he suffers from an incurable emotional problems. This is how Buffett describes Mr. Market in his 1987 shareholders letter:
At times he feels euphoric and can see only the favorable factors affecting the business. When in that mood, he names a very high buy-sell price because he fears that you will snap up his interest and rob him of imminent gains. At other times he is depressed and can see nothing but trouble ahead for both the business and the world. On these occasions he will name a very low price, since he is terrified that you will unload your interest on him.
Mr. Market was on full display in Q1.
For anyone just looking at their quarterly statement, and nothing else, the first quarter would have looked harmless. Emerging markets (VWO) up 6%, the S&P 500 (SPY) up a little and International developed markets (VXUS) pretty much flat.
But, for those paying attention the quarter felt less harmless. By February 11th, US, international and emerging-market funds were all down around 11%. This is the “depressed and can see nothing but trouble ahead” version of Mr. Market.
Then midway through the quarter, stocks began to rally. The quarter finished with the Mr. Market who “feels euphoric and can see only the favorable factors affecting the business.” From Feb 11th through the end of the quarter US and International stocks were up 13% and emerging-markets were up 18%.
Investors in equities who stuck around for the entire quarter were rewarded for being deliberate in their approach. Anyone who sold out in early February experienced the frustration of trying to time the markets.
Congratulations for not panicking
While focusing on the short-term and trying to time the markets is a fruitless endeavor, it is the business model on which most financial media are predicated. Their business model relies on driving a strong emotions reaction from you (usually either fear or greed) so as to drive more traffic to their website or TV program and, therefore, generate more advertising revenue. They don’t exist to give you relevant and actionable investment advice, or to help you time the markets.
On January 14th, we sent out a note to all clients with the subject of “Thoughts on Current Market Volatility.” It included the chart below which, I think, highlights this important point about the financial media.
Since 2010, each time CNBC has run their “Markets in Turmoil” special report it has actually been a pretty good buying opportunity.
It was nice to see the reaction from clients to this note. Most responses were some form of “I’m investing for the long-term so I’m not concerned with these short-term movements” or “I’ve been through this a few times; not worried.”
And this same deliberate approach that was so helpful in the quarter pays off over time as well. There are always going to be concerns and issues in the world. And the media are going to come up with headlines that focus attention to the short-term and neglect the long-term. But, as the chart below highlights, in investing, the rewards go to the deliberate and disciplined investors. Since 1970 investors in world stocks have seen $1 compound into $45 despite experiencing many market crises including: Black Monday, increased taxes, currency crises, the Y2K scare, the Dotcom bubble, and the Global financial crises among others.
In part two of the quarterly market recap we will examine two common concerns and frustrations we are hearing from both clients and generally in the financial media:
- How much longer can the current recovery last?
- And, the market has gone nowhere over the last year. Does this spell trouble for stocks?
Stay tuned for part two.