Hello, my precious readers, welcome back to the blog.
Following my post with the 2018 investment outlook for Stocks, Bonds, Oil, Gold and Real Estate, I’ll make an update on how the market is performing in the past 3 months.
Stock Market Outlook
In the first month of the year, we saw a huge increase in the market (S&P500), followed by a sharp decline in February. Since then it has been a roller coaster without any sign of ending. As I wrote in the 2018 investment outlook, I found it hard to see a sudden crash in the market that isn’t followed by a short-term recovery. The reason is that there is still a lot of money out there. Thus investors will see this more as opportunities and less like a moment to definitely exit.
Of course, if inflation arises, all bets are off.
Inflation is running at just 2.1 percent, so it’s still below average based on the past 90 years of data (about 3% since 1928).
Another possibility is geopolitical events. This recent “war” between the US and China (both countries imposing tariffs on imports) can definitely impact the stock market. Especially if this “war” escalates further. For now, I only see this as a tool of trade policy.
Also, a possible currency war alongside a trade war would be dangerous. Financial markets would be destabilized, and again, all bets are off from that point on.
Bond Market Outlook
On the bond market, when analyzing the ETF AGG and comparing it to the SPY, we also saw a negative return. In the previous post, I wrote:
“However keep in mind that in a diversified portfolio, having a decent allocation to bonds could be crucial to compensate the volatility of other assets. Consequently stabilizing the overall portfolio.” And boy (or girl) was I right.
With all this turmoil on financial markets, one thing that stood out was the volatility associated with the AGG: 2.8%. If you compare this with the volatility of the SPY (20.1%), you will see the reason why I wrote about the importance of having bonds (high quality) on your portfolio. It balances things out.
The United States 10-Year Bond Yield jumped from 2.5% to 2.8% (during this time it hit the 2.95%). I believe that if inflation increases (even slightly), it’s a matter of time until the Yield breaches the 3% level. In the end, a lot of what happens in the future will depend on how the FED will react to economic data, inflation and the stock market fluctuation.
Real Estate Market Outlook
One thing that increased fast was the 30-Yr Mortgage rate, from around 4.2% (January 2018) to around 4.7%. If we continue to see this growing trend, and in my opinion, the risk-reward for leveraging up real estate investments is unsuitable for the average investor.
The sales of US new homes decreased from 622k to 618k.
In terms of investing in Real Estate via ETF, the VNQ had a return of -7.8% with a volatility of over +18%. For those investors that like to enjoy opportunities one safer way of “entering” is to dollar cost averaging, i.e., to buy a fixed dollar amount of shares throughout a given period of time.
OIL and GOLD
OIL: Really surprised me the performance of OIL with a return of +11.1%. Although as I’ve written before, with a LOT of volatility (30%..roller coaster!). With all this uncertainty around the stock market, this was one of the assets that clearly came out as a winner. Although for the average investor, it may be advised to stay out of such unpredictable asset.
GOLD: Gold went nowhere with a +0.5% return. In a diversified portfolio, such as the “Harry Browne Permanent Portfolio” it could have a positive contribution. Harry Browne’s strategy breaks the asset allocation into four parts. 25% Stocks, 25% Bonds, 25% Cash, and 25% Gold. It’s an “all weather” portfolio.
The People Have Spoken (and They are Right)
One thing that surprised me was that readers of this post voted on Oil and were exactly right…in the first quarter. Let’s find out if they will win this poll at the end of the year.
This year is proving to be particularly interesting in terms of risk-management and asset-allocation. Even when two assets fall, you get to see the importance of diversifying. Look at a simple portfolio of 60% stocks (SPY) and 40% bonds (AGG). The return for the period Jan 02, 2018 – Mar 29, 2018, was -1.5% vs the return of SPY -1.7%. Furthermore, the volatility of the portfolio was 12.1%, which is far inferior to the volatility of the SPY (20.1%). Therefore the pressure to sell at the worst possible time is less in the portfolio when comparing with an all-stock strategy.
And you reader, what are your thoughts on the stock market? Do you see a bear market or this is the return of the normal volatility associated with riskier assets? What is your strategy going forward?
Don’t forget to do your own research and invest based on your own risk tolerance. This is not financial advice or any kind of advice. You’re the only responsible for your decisions.