October 2019 Viridian Market Update

By Brian Johnson, Chief Investment Officer and Shareholder.

Summary:  Though returns are strong year-to-date, stocks are hardly in a screaming bull market. In fact, bonds have actually outperformed most stock indices over the past year.

The third quarter of 2019 saw a mixed performance among major equity (stock) indices.  Domestically, the Dow Jones Industrial Average and S&P 500 indices, both representing U.S. large cap stocks, gained a bit more than 1% for the quarter.  The Nasdaq Composite Index, a traditionally more growth heavy index, dropped by 0.1%.  U.S. small caps, as measured by the Russell 2000 ETF (IWM) dipped by a little more than 2%.  Internationally, developed country stocks, as measured by the MSCI EAFE Index Fund ETF (EFA) fell a little less than 1%.  Bonds, on the other hand, as measured by Vanguard Intermediate-Term Treasury Fund (VFITX) rose by 1.6%.  Although the quarter brought mixed performance, year to date numbers remain positive, with the S&P 500 +20%, U.S. small cap stocks +14%, developed international stocks +13% and intermediate term bonds up almost 7%.[1]

While those year-to-date numbers are stellar, performance over the trailing 12 months is a different story. Recall that, in late September 2018, U.S. equity indices peaked and began a decline that didn’t bottom out until the final week of the year. As a result, when we look at the last 12 months (which includes most of that poor Q4-2018 showing), bonds actually outperformed stocks, as you can see in the chart below. Specifically, 12-month trailing returns by asset class were:

  • Intermediate-term bonds (the black line) +8.8%
  • Large cap U.S. stocks (blue line)                           +1.2%
  • Small cap U.S. stocks (orange line)                       -9.1%
  • Developed international stocks (purple line)    -3.2%

All this is to say that, despite strong YTD 2019 gains, we’re hardly in the midst of a roaring bull market for stocks. As a result, in our Viridian Balanced and Conservative strategies, which have shorter implied timeframes (before clients need access to money) and therefore never put all of their money in stocks, we continue to remain cautious in our stock allocations—especially with bonds doing so well. On the other hand, the longer-term time frames associated with the Viridian Growth and Aggressive strategies allow us to be fully or near-fully invested in stocks.

Despite the past year’s volatility, we have every reason to believe that the stock market remains in a long-term, “secular” (i.e., 10-20 year) bull market. In that context, what we’ve seen over the last year is likely to be nothing more than turbulence along the way. Bumps are always to be expected, and the next year should bring plenty more, as the U.S. faces a presidential election and a chance of recession on the horizon, central banks worldwide continue to negotiate this low interest rate environment, and China and the U.S. work towards a trade war resolution. We remain vigilant for the various ways these and other developments may impact your investments.

As always, if you have any questions at all, or if you have experienced a change in your lifestyle or goals, please don’t hesitate to reach out to your Viridian advisor. It’s our continued honor to serve you.

[1] Source data: FastTrack

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