Q3 Viridian Market Commentary
Written July 24, 2019 by Brian Johnson, Chief Investment Officer and Shareholder.
Summary: Returns have been stellar through the first half of 2019. We’re looking to take advantage of pullbacks.
It has been an incredible first half of 2019. The Dow Jones Industrial Average (“Dow”) just experienced its best June since 1938, while the S&P 500 posted its best first half since 1997[i]. All told, the first half of 2019 saw large-cap U.S. stocks rise by 18.3%, small-cap U.S. stocks by 16.8%, developed international stocks by 14.1%, and emerging market stocks by 12.6%[ii]. Bonds have also performed well over the first half, with the aggregate U.S. bond market rallying 5.8%[iii], as it become increasingly likely that the Federal Reserve (Fed) will reduce short-term interest rates, rather than raising them further this year.
It was in July of 2018, a year ago now, that we moved away from our overweight stock position in the Viridian Balanced model, shifting some of that money into bonds. We also reduced exposure (with a shift to less volatile growth holdings) in our other strategies. Since that reduction in our stock allocation, we have not considered it safe to move back to an overweight position in stocks. In fact, we further reduced our stock allocation to underweight last November.
Given the implied timeframe for money in our Viridian Balanced strategy (i.e., that clients might need to access it within 3-7 years), this cautious allocation has proven prudent. During the past 12 months, stocks experienced a roughly 20% drawdown and then recovery, while bonds have, for the most part, held their own and steadily moved higher. At the end of the day, despite the stellar performance of stocks year-to-date, performance of the aggregate bond market and large cap U.S. stocks over the past year have been pretty similar, as stocks have risen +8.2% and bonds +7.4%.[iv]
At this point, we have every reason to believe that the stock market remains in a long-term, “secular” (i.e., 10-20 year) bull market. Our expectation is that the modest returns we’ve seen in stocks and stellar performance of bonds over the past year should give way to higher stock returns and relative underperformance for bonds. This suggests that a reallocation from bonds back into stocks lies ahead. We hope to be able to take advantage of a market pullback to execute this reallocation.
The road to returns is never a straight one, and we expect continued
volatility surrounding several events in the months ahead: the upcoming 2020
election; the Fed’s decision to move from quantitative tightening to easing;
Chinese trade negotiations; and, of particular importance, the need to be alert
for signs and indicators that we may be approaching a recession. As always, if your goals have changed at all
please don’t hesitate to reach out to your Viridian Advisor. It’s our continued honor to serve you, and we wish
you a wonderful summer.
[i] Source: CNBC – https://www.cnbc.com/2019/06/28/by-the-numbers-best-june-for-the-dow-since-1938-sp-500s-best-first-half-in-two-decades.html
[ii] Source: FastTrack data, inclusive of dividends. Large-cap U.S. Stocks, S&P 500 – SPY ETF. Small-cap U.S. Stocks, Russell 2000 – IWM ETF. Developed international stocks, FTSE Developed Markets – VEA ETF. Emerging market stocks, FTSE Emerging Markets – VWO ETF.
[iii] Source: FastTrack data, inclusive of dividends. Aggregate U.S. Bond Market, U.S. Aggregate Bond Index – AGG ETF
[iv] Aggregate Bond Market – AGG ETF, Large-cap U.S. Stocks – SPY ETF