Benchmark Returns for the Period Ended March 2018
| Annualized | ||||
|---|---|---|---|---|
| Quarter | 1 Year | 5 Year | 10 Year | |
| US Treasury Bills (one month) | 0.34% | 1.03% | 0.30% | 0.29% |
| Barclays Capital US Gov’t/Credit Inter Bond | -0.98% | 0.35% | 1.25% | 2.92% |
| Standard & Poor’s 500 | -0.76% | 13.99% | 13.31% | 9.49% |
| Russell 1000 Value (large cap value) | -2.83% | 6.95% | 10.78% | 7.78% |
| Russell 2000 (small cap) | -0.08% | 11.79% | 11.47% | 9.84% |
| Morgan Stanley Europe, Australia and Far East (EAFE) | -1.53% | 14.80% | 6.50% | 2.74% |
| Wilshire REIT | -7.48% | -3.64% | 6.13% | 6.22% |
| Source for returns: Morningstar TM as of 3/31/2018. | ||||
Markets started strong in January, with the S&P 500 reaching an all-time high. This came on the back of historically low unemployment, healthy GDP growth, and the passage of tax reform in late 2017. This was followed by a pullback in February and March, leading the S&P 500 to return -0.76% for its first negative quarter since 2015. The Dow Jones Industrial Average returned -1.96%, and the Nasdaq returned 2.59%. International developed markets, as measured by the MSCI EAFE, returned -1.53%, while emerging markets, as measured by the MSCI Emerging Markets Index, returned 1.42%. Although economic indicators remained positive during the quarter, uncertainty regarding interest rates and trade policies loomed large.
In March, the Fed increased its benchmark funds rate another 25 basis points to a range of 1.50%-1.75%. This was the sixth rate hike since December 2015. The Fed also signaled that it expects to raise rates multiple times this year. When the economy is strong, and looks to remain so, the Fed may raise interest rates to prevent high inflation. Their challenge is finding the sweet spot which allows some inflation but not too much. While rate increases tend to affect bond prices and Real Estate Investment Trusts (REITs) negatively, their impact on the overall equity markets is difficult to determine or predict. These effects also vary for different sectors of the equity markets and the overall economy.
Investing in equities comes with risks and the markets do a great job reminding us of this. As measured by the S&P 500, investors experienced an unprecedented 15 straight months of positive returns from November 2016 to January 2018. Now, after its extended absence, volatility reappeared in equity markets, which is normal. This confirms that predicting what streak will occur over the next 15 months, or even 15 days, is guesswork. If there were no risk, you would expect returns to be near zero.
What the markets have taught us over the past 100 or so years is that having a disciplined and diversified approach over the long-term will reward investors, but that trying to predict their next move is all but impossible. What is possible, and prudent, is managing risk, planning for volatility and downturns, and maintaining diversification. Walter Wriston, former chairman of Citicorp, once said, “All of life is the management of risk, not its elimination.”
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. The index returns above assume reinvestment of all distributions. This information is for educational purposes only and should not be considered investment advice or an offer of any security for sale.
