SJS Weekly Market Update
SJS Investment Services creates a weekly market update to summarize performance characteristics for major stock and bond indices.
Each week, SJS Investment Services creates a Weekly Market Update to summarize performance characteristics for major stock and bond indices. Please click on the below image to view the most recent Weekly Market Update PDF.
Past Weekly Market Updates:
Important Disclosure Information:
Past performance does not guarantee future results. There is no guarantee investment strategies will be successful. Diversification neither assures a profit nor guarantees against a loss in a declining market. Indices are not available for direct investment. Their performance does not reflect the expenses associated with management of an actual portfolio. This material has been prepared for informational purposes only.
All returns represent total return (including reinvestment of dividends) for stated period provided by Morningstar Direct.
Equity indexes are as follows: US Market (Russell 3000 TR USD Index measures the performance of the largest 3000 US companies representing approximately 98% of the investable US equity market. It is market-capitalization weighted.); US Large Cap (S&P 500 TR USD Index measures the performance of 500 widely held stocks in US equity market. Standard and Poor's chooses member companies for the index based on market size, liquidity and industry group representation. Included are the stocks of industrial, financial, utility, and transportation companies. Since mid 1989, this composition has been more flexible and the number of issues in each sector has varied. It is market capitalization-weighted.); US Small Cap (Russell 2000 TR USD Index measures the performance of the small-cap segment of the US equity universe. It is a subset of the Russell 3000 and includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership. Russell Investment Group is the source and owner of the trademarks, service marks and copyrights related to the Russell Indexes. Russell® is a trademark of Russell Investment Group.); Global Market (MSCI ACWI GR USD Index measures the performance of the large and mid cap segments of all country markets. It is free float-adjusted market-capitalization weighted.); Intl Development (MSCI EAFE GR USD Index measures the performance of the large and mid cap segments of developed markets, excluding the US & Canada equity securities. It is free float-adjusted market-capitalization weighted.); Emerging Markets (MSCI Emerging Markets GR USD Index measures the performance of the large and mid cap segments of emerging market equity securities. It is free float-adjusted market-capitalization weighted.); US Real Estate (DJ US Select REIT TR USD Index measures the performance of publicly traded real estate investment trusts(REITs) and REIT-like securities. The index is a subset of the Dow Jones US Select Real Estate Securities Index (RESI). The index is designed to serve as proxy for direct real estate investment, in part by excluding companies whose performance may be driven by factors other than the value of real estate.); Intl Real Estate (S&P Global Ex US REIT TR USD Index measures the performance of publicly traded REITs and REIT-like securities, excluding those in the U.S., and is a sub-index of the Dow Jones Global ex-U.S. Select Real Estate Securities Index (RESI). The index is designed to serve as a proxy for direct real estate investment, in part by excluding companies whose performance may be driven by factors other than the value of real estate.
Fixed Income indexes are as follows: US Aggregate – (Bloomberg Barclays US Aggregate Bond TR USD Index measures the performance of investment grade, U.S. dollar-denominated, fixed-rate taxable bond market, including Treasuries, government-related and corporate securities, MBS (agency fixed-rate and hybrid ARM passthroughs), ABS, and CMBS. It rolls up into other Barclays flagship indices, such as the multi-currency Global Aggregate Index and the U.S. Universal Index, which includes high yield and emerging markets debt.); Global Aggregate (Bloomberg Barclays Global Aggregate TR USD Index measures the performance of global investment grade fixed-rate debt markets, including the U.S. Aggregate, the Pan-European Aggregate, the Asian-Pacific Aggregate, Global Treasury, Eurodollar, Euro-Yen, Canadian, and Investment Grade 144A index-eligible securities.); US Short Treasury – ICE BofAML 1-3Y US Trsy TR USD Index measures the performance of US dollar denominated sovereign debt publicly issued by the US government in its domestic market. Qualifying securities must have at least 1 year and less than 3 year remaining term to final maturity, a fixed coupon schedule and a minimum amount outstanding of $1 billion. It is capitalization-weighted.); US Interm Corp & Govt (ICE BofAML 1-5Y US Corp&Govt TR USD Index is a subset of BofA Merrill Lynch US Corporate & Government Index including all securities with a remaining term to final maturity less than 5 years. The BofA Merrill Lynch US Corporate & Government Index tracks the performance of US dollar denominated investment grade debt publicly issued in the US domestic market, including US Treasury, US agency, foreign government, supranational and corporate securities. Treasury Yields are as follows: US Treasury T-Bill Constant Maturity Rates (These rates are commonly referred to as "Constant Maturity Treasury" rates, or CMTs. Yields are interpolated by the Treasury from the daily yield curve. This curve, which relates the yield on a security to its time to maturity is based on the closing market bid yields on actively traded Treasury securities in the over-the-counter market. These market yields are calculated from composites of indicative, bid-side market quotations (not actual transactions) obtained by the Federal Reserve Bank of New York at or near 3:30 PM each trading day. The CMT yield values are read from the yield curve at fixed maturities, currently 1, 2, 3 and 6 months and 1, 2, 3, 5, 7, 10, 20, and 30 years. This method provides a yield for a 10 year maturity, for example, even if no outstanding security has exactly 10 years remaining to maturity.)
Style Returns: Style box returns are based on the Russell Index Style - Russell 1000 Value Index (Measures the performance of those Russell 1000 companies with lower price-to-book ratios and lower forecasted growth values), Russell 1000 Index (Measures the performance of the largest 1,000 securities in the Russell 3000 based on market cap and current index membership), Russell 1000 Growth Index (Measures the performance of those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values), Russell Mid Cap Value Index (Measures the performance of those Russell Mid Cap companies with lower price-to-book ratios and lower forecasted growth values), Russell Mid Cap Index (The Russell Midcap Index includes the smallest 800 securities in the Russell 1000), Russell Mid Cap Growth Index (Measures the performance of those Russell Mid Cap companies with higher price-to-book ratios and higher forecasted growth values),Russell 2000 Value Index (Measures the performance of those Russell 2000 companies with lower price-to-book ratios and lower forecasted growth values), Russell 2000 Index (The Russell 2000 includes the smallest 2000 securities in the Russell 3000), Russell 2000 Growth Index (Measures the performance of those Russell 2000 companies with higher price-to-book ratios and higher forecasted growth values).
Sector Returns: Sectors are based on the Russell Sector Classification methodology. Return data are calculated by Morningstar Direct using constituents and weights as provided by MSCI for the All Country World Index.
Market Indicator Indexes are as follows: Inflation - (The Consumer Price Index for All Urban Consumers: All Items (CPIAUCSL) is a measure of the average monthly change in the price for goods and services paid by urban consumers between any two time periods. It can also represent the buying habits of urban consumers. This particular index includes roughly 88 percent of the total population, accounting for wage earners, clerical workers, technical workers, self-employed, short-term workers, unemployed, retirees, and those not in the labor force.); Unemployment - (The unemployment rate represents the number of unemployed as a percentage of the labor force. Labor force data are restricted to people 16 years of age and older, who currently reside in 1 of the 50 states or the District of Columbia, who do not reside in institutions (e.g., penal and mental facilities, homes for the aged), and who are not on active duty in the Armed Forces. This rate is also defined as the U-3 measure of labor underutilization. The series comes from the 'Current Population Survey (Household Survey)').
Suggested Reading
Unexpected Good News: Market Performance So Far In 2023
It’s important to recognize how difficult it is to predict what will happen in the short-term for investment markets, and how much margin for error there should be for any prediction.
By Chief Investment Officer Tom Kelly, CFA.
If you looked at economic and market forecasts at the beginning of the year, you may have expected a lot of volatility and negative returns in stock and bond markets for 2023. For example, the headline for J.P. Morgan’s 2023 Market Outlook is, "Stocks Set to Fall Near-Term as Economic Growth Slows".[1] Additionally, on the first page of UBS' 2023 US Equities Outlook, UBS writes, "With pressure on corporate profits for the next few quarters, equity markets could slip in the near term. However, the outlook should improve later in the year and into 2024."[2]
Contrary to these headlines, most global stock and bond markets are up to start 2023. While some markets (like U.S. bonds) are modestly positive based on their increased yields, others (such as U.S. stocks) are up significantly more than even we could have reasonably optimistically expected. We have experienced a lot of events to start 2023 (persisting core inflation, U.S. debt ceiling negotiations, the expansion of artificial intelligence, corporate job layoffs, etc.), and it would have been difficult for us to predict this market performance given these events. While it is easy to look back at the headlines from the beginning of 2023 and point toward their inaccuracies, it’s important to recognize how difficult it is to predict what will happen in the short-term for investment markets, and how much margin for error there should be for any prediction.
Source: Morningstar, as of June 30, 2023. The asset classes are represented by the following indices: U.S. Stocks - Russell 3000 Index (measures performance of the 3,000 largest U.S. companies representing roughly 96% of the investable U.S. stock market); International Stocks - MSCI All Country World Ex USA IMI Index (Gross Div.) (measures performance of approximately 99% of the global stock opportunity set outside of the U.S.); U.S. Bonds - Bloomberg U.S. Aggregate Bond Index (tracks performance of the U.S. investment-grade bond market); International Bonds - Bloomberg Global Aggregate Ex-USD Bond Index (Hedged To USD) (measures the performance of international investment grade bonds, with currency exposure hedged to the U.S. dollar); Global Real Estate - S&P Global REIT Index (Gross Div.) (tracks performance of publicly traded equity REITS globally). The index performance figures assume the reinvestment of all income, including dividends and capital gains. See Important Disclosure Information.
When it comes to investment markets, it’s easy to look back positively on the past and worry about the future. This is part of human nature, written about extensively through research on biases such as the availability bias (over-emphasizing news that is readily available to us) and negativity bias (focusing on negative aspects of a situation). This makes sense, because most people are more negatively impacted by losses than they are positively impacted by gains.[3] But we’re always here to help take the worry away!
Over the long-term, we expect positive returns from global stock, bond, and alternative markets. Positive returns will not occur every year, but over a long enough time period, we expect these asset classes to continue to have positive returns.[4] We don’t know what will happen for the rest of 2023 or even in the coming years, but we remain optimistic about investment returns over the long term for the future. Staying invested and remaining disciplined in your investment allocation is often the best way to avoid psychological pitfalls and achieve your desired outcomes.
Important Disclosure Information & Sources:
[1] “2023 Market Outlook: Stocks Set to Fall Near-Term as Economic Growth Slows”. J.P. Morgan, 05-Jan-2023, jpmorgan.com.
[2] “US equities 2023 outlook: From inflation to growth“. UBS, 16-Dec-2022, ubs.com.
[3] Thinking, Fast and Slow. Daniel Kahneman, 2011, Farrar, Straus and Giroux.
[4] "Historical Returns on Stocks, Bonds and Bills: 1928-2022". Aswath Damodaran, January 2023, stern.nyu.edu.
There is no guarantee investment strategies will be successful. Past performance is no guarantee of future results. Diversification neither assures a profit nor guarantees against a loss in a declining market.
Statements contained in this report that are not statements of historical fact are intended to be and are forward looking statements. Forward looking statements include expressed expectations of future events and the assumptions on which the expressed expectations are based. All forward looking statements are inherently uncertain as they are based on various expectations and assumptions concerning future events and they are subject to numerous known and unknown risks and uncertainties which could cause actual events or results to differ materially from those projected.
Indices are not available for direct investment. Index performance does not reflect the expenses associated with management of an actual portfolio. Index performance is measured in US dollars. The index performance figures assume the reinvestment of all income, including dividends and capital gains.
Advisory services are provided by SJS Investment Services, a registered investment advisor (RIA) with the SEC. Registration does not imply a certain level of skill or training. SJS Investment Services does not provide legal or tax advice. Please consult your legal or tax professionals for specific advice.
Hyperlinks to third-party information are provided as a convenience.
Tomorrow's Headlines Today
The market’s reaction to tech in the first quarter is another reminder of how hard it is to time and predict the market, even if you “know” what is going to happen.
By Chief Investment Officer Tom Kelly, CFA.
What if you could get the headlines of the market before everyone else? Do you think it would make you a better investor? Provide you with an edge to get that “superior return” you’ve always wanted? In some cases, perhaps, but in others, I suspect the market’s ability to move unexpectedly could leave you worse off.
What if I told you at the beginning of the year that the largest tech companies would continue their string of layoffs, the bank most tied to serving Silicon Valley technology firms would suffer a bank run and collapse, and central bankers would continue to raise interest rates? Would you have guessed the technology sector in the global stock market (as measured by the MSCI All Country World Index (Gross Div.)) would be up over 20%? Doubtful.
Source: Morningstar, as of March 31, 2023. The MSCI ACWI Index is a free float-adjusted market capitalization weighted index designed to measure the equity market performance of developed and emerging markets, consisting of 47 country indices comprising 23 developed and 24 emerging market country indices. Indices are not available for direct investment. Index performance does not reflect the expenses associated with management of an actual portfolio. Index performance is measured in US dollars. The index performance figures assume the reinvestment of all income, including dividends and capital gains. See Important Disclosure Information.
Certainly, there are other factors at play than the ones above (the expectation of an end to Fed interest rate hikes is likely a large contributor to technology outperformance), but that’s how the market operates. The variables we think matter often don’t (or matter less), and outside events often disrupt or complement even the most well researched thesis.
The market’s reaction to tech in the first quarter is another reminder of how hard it is to time and predict the market, even if you “know” what is going to happen. The moral of the story is that we need to remain diversified and invested, even if we think we know how the story might end.
Important Disclosure Information:
There is no guarantee investment strategies will be successful. Past performance is no guarantee of future results. Diversification neither assures a profit nor guarantees against a loss in a declining market.
Advisory services are provided by SJS Investment Services, a registered investment advisor (RIA) with the SEC. Registration does not imply a certain level of skill or training. SJS Investment Services does not provide legal or tax advice. Please consult your legal or tax professionals for specific advice.
Statements contained in this report that are not statements of historical fact are intended to be and are forward looking statements. Forward looking statements include expressed expectations of future events and the assumptions on which the expressed expectations are based. All forward looking statements are inherently uncertain as they are based on various expectations and assumptions concerning future events and they are subject to numerous known and unknown risks and uncertainties which could cause actual events or results to differ materially from those projected.
Hyperlinks to third-party information are provided as a convenience.
What's Happening With The Chinese Stock Markets?
China has been growing rapidly from an economic perspective. So what’s happening with the Chinese stock markets?
By Investment Associate Bobby Adusumilli, CFA.
2021 was a turbulent year for Chinese stocks. Partially due to concerns about government involvement in businesses, human rights, and the repercussions of the COVID-19 pandemic, the MSCI China Index declined nearly 22% in 2021, compared to a 10% gain for the MSCI Emerging Markets ex China Index.[1][2][3] To demonstrate the significance of China to emerging markets stock performance, the MSCI Emerging Markets Index fell roughly 2.5% in 2021, of which Chinese stocks make up approximately 29%.[4]
Source: MSCI, as of December 31, 2021. Please see Important Disclosure Information.
As the above illustrates, Chinese stocks and emerging markets stocks more generally have had rough performance relative to the United States over the past ten years.[5] However, that does not mean that investors should abandon emerging markets stocks. As the above fundamentals demonstrate, emerging markets (including China) stocks are significantly cheaper than US stocks. Additionally, even with the poor performance in 2021, Chinese stocks have outperformed other emerging markets stocks over the past ten years while also having similar forward-looking valuation metrics, suggesting Chinese stocks can help emerging markets investments.
Demographic trends seem to indicate there will be more economic growth in emerging markets like China compared to more developed markets such as the US.[6] To illustrate this trend, the below graph shows the gross domestic product (GDP) - a measure of the goods and services produced in a country during a period of time - of China and the US. In 1980, China’s GDP was 11% of the United States' GDP; by 2021, China’s GDP had grown to 86% of the United States' GDP.[7]
Source: “GDP, current prices“. International Monetary Fund, imf.org/en/Home. Please see Important Disclosure Information.
Many of the world’s top investors are also investing heavily in China. For example, according to the Wall Street Journal, venture-capital investors invested $129 billion into more than 5,300 startups in China in 2021.[8] These investments made up roughly 20% of the approximately $643 billion in global venture capital investments in 2021.[8][9] For comparison, Chinese stocks currently only make up 4% of global stock market capitalization as measured by the MSCI All Country World Index (ACWI).[10] This venture capital activity suggests that the aggregate market capitalization of Chinese stocks will grow considerably in the years to come.
While the various investor concerns about China are legitimate, it is important to note that among companies on stock exchanges in developed markets (including the US), nearly 20% of their revenues come from emerging markets, with China being the single-biggest revenue source.[11] Given the global nature of business today, it is very difficult to invest in stocks without having direct or indirect exposure to China. Investors worried about certain practices in Chinese companies can invest in ESG (Environment, Social, & Governance)-focused emerging markets mutual funds and ETFs, which can help people decrease exposure to companies that don’t match their values. Or investors can invest in emerging markets mutual funds and ETFs that exclude Chinese stocks.
China has been growing rapidly from an economic perspective, with the amount of people in the middle class rising significantly, as well as innovative companies starting in China at a number only rivaled by the United States.[12][7] Given all of the above, we believe Chinese stocks are positioned to have positive expected returns over the intermediate- and long-term.
Important Disclosure Information & Sources:
[1] “Chinese Companies Listed at Home Surge While Crackdowns Clobber Those Abroad“. Rebecca Feng, 03-Jan-2022, wsj.com.
[2] “MSCI China Index (USD)“. MSCI, 31-Dec-2021, msci.com. The MSCI China Index captures large and mid cap representation across China A shares, H shares, B shares, Red chips, P chips and foreign listings (e.g. ADRs). The index covers about 85% of this China equity universe. Currently, the index includes Large Cap A and Mid Cap A shares represented at 20% of their free float adjusted market capitalization.
[3] “MSCI Emerging Markets ex China Index (USD)“. MSCI, 31-Dec-2021, msci.com. The MSCI Emerging Markets ex China Index captures large and mid cap representation across 24 of the 25 Emerging Markets (EM) countries excluding China. The index covers approximately 85% of the free float-adjusted market capitalization in each country.
[4] “MSCI Emerging Markets Index (USD)”. MSCI, 31-Dec-2021, msci.com. The MSCI Emerging Markets Index captures large and mid cap representation across 25 Emerging Markets (EM) countries. The index covers approximately 85% of the free float-adjusted market capitalization in each country.
[5] “MSCI USA Index”. MSCI, 31-Dec-2021, msci.com. The MSCI USA Index is designed to measure the performance of the large and mid cap segments of the US market. The index covers approximately 85% of the free float-adjusted market capitalization in the US.
[6] “Real GDP growth“. International Monetary Fund, imf.org/en/Home.
[7] “GDP, current prices“. International Monetary Fund, imf.org/en/Home.
[8] “China’s Startups Are Awash With Money as Beijing Shifts Focus to ‘Hard Tech’“. Liza Lin, Jing Yang, & Keith Zhai, 13-Jan-2022, wsj.com.
[9] “Global Venture Funding And Unicorn Creation In 2021 Shattered All Records“. Gene Teare, 05-Jan-2022, crunchbase.com.
[10] “MSCI ACWI Index (USD)“. MSCI, 31-Dec-2021, msci.com. The MSCI ACWI captures large and mid cap representation across 23 Developed Markets (DM) and 25 Emerging Markets (EM) countries. The index covers approximately 85% of the global investable equity opportunity set.
[11] “The Ever Given, Suez Canal and Impact of One Stuck Ship on the Global Economy“. Avantis Investors, March 2021, avantisinvestors.com.
[12] “China’s Influence on the Global Middle Class“. Homi Kharas & Meagan Dooley, October 2020, brookings.edu.
There is no guarantee investment strategies will be successful. Past performance is no guarantee of future results. Diversification neither assures a profit nor guarantees against a loss in a declining market.
Statements contained in this article that are not statements of historical fact are intended to be and are forward looking statements. All forward looking statements are inherently uncertain as they are based on various expectations and assumptions concerning future events and they are subject to numerous known and unknown risks and uncertainties which could cause actual events or results to differ materially from those projected.
Indices are not available for direct investment. Index performance does not reflect the expenses associated with management of an actual portfolio. Index performance is measured in US dollars. The index performance figures assume the reinvestment of all income, including dividends and capital gains. The performance of the indices was obtained from published sources believed to be reliable but which are not warranted as to accuracy or completeness.
Advisory services are provided by SJS Investment Services, a registered investment advisor (RIA) with the SEC. Registration does not imply a certain level of skill or training. This material has been prepared for informational purposes only.
Hyperlinks to third-party information are provided as a convenience and we disclaim any responsibility for information, services or products found on websites or other information linked hereto.
Are Stocks Riskier Than Bonds?
You have probably heard the saying, “Stocks are riskier than bonds.” While the logic makes sense, are stocks actually riskier than bonds?
By SJS Investment Services Investment Associate Bobby Adusumilli, CFA.
You have probably heard the saying, “Stocks are riskier than bonds.” The idea is that if investors take greater risk, they should get rewarded with a higher return over time; therefore, since stocks are riskier than bonds, then stocks should have higher returns over time. While the logic seems to make sense, we wanted to look at the historical data to answer the question: are stocks actually riskier than bonds?
The answer is: it depends on how you define risk. If you define risk as portfolio fluctuations over the short-term, then stocks have generally been riskier than bonds. However, if you define risk as loss of wealth over the long-term, or as lost opportunity to grow wealth over the long-term, then you may be surprised to learn that stocks may not actually be much riskier than bonds.
We want to illustrate these points via graphs. We use the S&P 500 Index as representative of the U.S. stock market, and the Bloomberg Barclays U.S. Aggregate Bond Index as representative of the U.S. bond market.[1][2] We want to focus on increases in purchasing power, so we use the U.S. Consumer Price Index (CPI) to calculate real (inflation-adjusted) returns.[3] Additionally, in order to use as much reliable historical data as we can, we chose the S&P 500 Index that has available data since 1926, while the Bloomberg Barclays U.S. Aggregate Bond Index has data since 1976.
It’s important to emphasize that indices are not directly investable. Before the last few decades, it was difficult for an individual to invest similar to a broadly-diversified index in a low-cost, tax-efficient, trading-efficient way. Therefore, it is unreasonable to expect that any investor could have matched the index returns below. However, with the increasing popularity of index funds over the past 25 years, an individual investor has a much greater ability to achieve returns similar to a well-known index in a low-cost, tax-efficient, trading-efficient way going forward.[4]
Risk: Portfolio Fluctuations Over The Short-Term
The U.S. stock market tends to fluctuate a lot from year-to-year. Since 1926 using end-of-year data, yearly real returns have ranged from -38% to +58%, rarely staying flat.
![Source: Dimensional Returns Web. See “Important Disclosure Information” below.[1]](https://images.squarespace-cdn.com/content/v1/5ee8ee8eb4fb337e3b806c1e/1620415191588-HMRZRCBNT9WB2VWZR882/2021.05.14+One-Year+Real+Returns+-+S%26P+500+Index.png)
Source: Dimensional Returns Web. See “Important Disclosure Information” below.[1]
Comparatively, the U.S. fixed income market has been much more steady. Since 1976, yearly real returns have ranged from -10% to 27%, with most returns within the range of -7% to 7%.
![Source: Dimensional Returns Web. See “Important Disclosure Information” below.[2]](https://images.squarespace-cdn.com/content/v1/5ee8ee8eb4fb337e3b806c1e/1620415588202-8XV9W7OOGHZUL4L3AOR5/2021.05.14+One-Year+Real+Returns+-+Bloomberg+Barclays+U.S.+Aggregate+Bond+Index.png)
Source: Dimensional Returns Web. See “Important Disclosure Information” below.[2]
These graphs above support the argument that stocks are riskier than bonds, if you define risk as fluctuations in value over the short-term.
Risk: Loss Of Wealth Over The Long-Term
Since 1945 based on end-of-year data, the U.S. stock market has not had a negative 20-year real return. The annualized 20-year real returns have ranged from 1% to 15%.
![Source: Dimensional Returns Web. See “Important Disclosure Information” below.[1]](https://images.squarespace-cdn.com/content/v1/5ee8ee8eb4fb337e3b806c1e/1620415659708-E17JQW7W4UU8USDJY8RF/2021.05.14+Rolling+20-Year+Real+Annualized+Returns+-+S%26P+500+Index.png)
Source: Dimensional Returns Web. See “Important Disclosure Information” below.[1]
Similarly since 1995, the U.S. bond market 20-year real return has never been negative. The annualized 20-year real returns have ranged from 3% to 7%, and have generally been steadier than the U.S. stock market.
![Source: Dimensional Returns Web. See “Important Disclosure Information” below.[2]](https://images.squarespace-cdn.com/content/v1/5ee8ee8eb4fb337e3b806c1e/1620415710802-QJP1FYOGKXTQ4N5A9763/2021.05.14+Rolling+20-Year+Real+Annualized+Returns+-+Bloomberg+Barclays+U.S.+Aggregate+Bond+Index.png)
Source: Dimensional Returns Web. See “Important Disclosure Information” below.[2]
It’s surprising, but if you define risk as loss of wealth over the long-term, then U.S. stocks have not actually been much riskier than U.S. bonds over longer-term periods.
Why This Matters
You may be wondering why the definition of risk matters. To demonstrate, this graph below shows the real growth of $100 for both the U.S. stock market and U.S bond market since 1976. Although U.S. stocks had significantly greater short-term fluctuations than U.S. bonds, $100 grew to $3,184 for the U.S. stock market, compared to $510 for the U.S bond market. A big difference.
![Source: Dimensional Returns Web. See “Important Disclosure Information” below.[1][2]](https://images.squarespace-cdn.com/content/v1/5ee8ee8eb4fb337e3b806c1e/1620415766061-MAZSITG7UIK5VMBBF5JD/2021.05.14+Real+Growth+of+100+Dollars+-+S%26P+500+Index+and+Bloomberg+Barclays+U.S.+Aggregate+Bond+Index.JPG)
Source: Dimensional Returns Web. See “Important Disclosure Information” below.[1][2]
If you define risk as short-term fluctuations in value, then you may be tempted to invest more in bonds than in stocks. Conversely, if you define risk as long-term loss of wealth or lost opportunity to grow wealth, then you may be able to better withstand the yearly fluctuations in favor of more stocks. As Jeremy Siegel wrote in his best-selling book, you may be able to commit yourself to “stocks for the long run”.[5]
Considerations
Because of evolving needs, many investors use different definitions of risk at different periods of time as well as for different accounts. There are many legitimate reasons to focus on short-term portfolio fluctuations - and thus potentially invest more in bonds - including:
Cash flow needs in the short-term and / or intermediate-term
Potential expected return benefits through diversification and rebalancing
Belief that the stock market will not continue to provide positive returns in the future
Ability to psychologically withstand large market fluctuations
Focusing more on current self compared to future self
If you have varying goals and time horizons for your wealth, then you can consider the following:
For shorter-term (<5 years) cash flow needs, you can define risk as short-term portfolio fluctuations, and focus more on bonds.
For longer-term (10+ years) investing (e.g., 401(k), IRA, savings for future children / grandchildren), you can define risk as long-term loss of wealth, and focus more on stocks.
For intermediate-term (5-10 years) cash flow needs, you can combine the definitions of risk, and use a balanced portfolio of stocks and bonds.
Conclusion
Many investors have greatly benefitted from investment markets historically (particularly stocks), and we expect investors to continue to benefit going forward.[6] Defining how you think about risk can significantly impact your future returns. If you have any questions or want to talk about your situation, please feel free to reach out to us.
Important Disclosure Information & Sources:
[1] The S&P 500 Index is a free float-adjusted market-capitalization-weighted index of 500 of the largest publicly traded companies in the United States.
[2] The Bloomberg Barclays US Aggregate Bond TR USD Index measures the performance of investment grade, U.S. dollar-denominated, fixed-rate taxable bond market, including Treasuries, government-related and corporate securities, MBS (agency fixed-rate and hybrid ARM passthroughs), ABS, and CMBS.
[3] The US Bureau of Labor Statistics Consumer Price Index (CPI) All Urban Seasonally Adjusted is a measure of the average monthly change in the price for goods and services paid by urban consumers between any two time periods. It can also represent the buying habits of urban consumers. This particular index includes roughly 88 percent of the total population, accounting for wage earners, clerical workers, technical workers, self-employed, short-term workers, unemployed, retirees, and those not in the labor force.
[4] “Index Funds Are the New Kings of Wall Street“. Dawn Lim, 28-Sep-2019, wsj.com.
[5] “Stocks for the Long Run 5/E: The Definitive Guide to Financial Market Returns & Long-Term Investment Strategies“. Jeremy Siegel, 2014, McGraw-Hill Education.
[6] “SJS 2021 Capital Markets Expectations: Making Sense Of The Future“. SJS Investment Services, 04-Feb-2021, sjsinvest.com/blog.
There is no guarantee investment strategies will be successful. Past performance is no guarantee of future results. Diversification neither assures a profit nor guarantees against a loss in a declining market.
Indices are not available for direct investment. Index performance does not reflect the expenses associated with management of an actual portfolio. Index performance is measured in US dollars. The index performance figures assume the reinvestment of all income, including dividends and capital gains. The performance of the indices was obtained from published sources believed to be reliable but which are not warranted as to accuracy or completeness.
Statements contained in this report that are not statements of historical fact are intended to be and are forward looking statements. Forward looking statements include expressed expectations of future events and the assumptions on which the expressed expectations are based. All forward looking statements are inherently uncertain as they are based on various expectations and assumptions concerning future events and they are subject to numerous known and unknown risks and uncertainties which could cause actual events or results to differ materially from those projected.
Hyperlinks to third-party information are provided as a convenience and we disclaim any responsibility for information, services or products found on websites or other information linked hereto.
Suggested Reading
Do SPACs Deserve Our Blank Checks?
A SPAC is a publicly traded company that raises money from investors with the intent of taking some not-yet-determined private company public. Like giving your child a blank check to go buy whatever they want. What could go wrong?
By SJS Investment Services Chief Investment Officer Tom Kelly, CFA.
“What do you mean I don’t have any more money in my bank account? I have all these blank checks!”
I was reminded of this oft-quoted family teaching moment on the value of a blank check (the speaker of which will remain anonymous) when I first heard about SPACs. Special-purpose acquisition companies (SPACs), sometimes referred to as “blank check” companies, offer an alternative to the traditional Initial Public Offering (IPO) process of taking a company from private to public. A SPAC is a publicly traded company that raises money from investors with the intent of taking some not-yet-determined private company public. Like giving your child a blank check to go buy whatever they want. What could go wrong?
A SPAC is created by a sponsor (often of celebrity status) which issues publicly tradeable shares (typically $10 per share) in exchange for investor money. Once enough money is raised, the sponsor searches for a target company to acquire. The investors often have little idea what company will be acquired, or even if there is a targeted industry. After the SPAC finds a private company and completes a SPAC IPO, then the shares of the SPAC merge into the shares of the new publicly traded company. For their efforts, the sponsor typically receives 20% of the new publicly traded company’s post-SPAC IPO common shares (known as the promote). However, if a SPAC IPO is not completed within two years, then usually the SPAC is liquidated and investors get their money back.
SPACs are not new, but they have received notoriety as of late. There were 248 SPAC IPOs in 2020 raising $83 billion, and 288 deals with over $93 billion in proceeds so far in 2021 (through March 23). In contrast, there were 226 SPAC IPOs raising $47 billion total from 2009-2019.[1]
Compared to traditional IPOs, the potential benefits of SPAC IPOs include:
For the private company, a typically faster public listing from the merger announcement to completion.
For the private company, usually greater certainty regarding IPO money raised.
For investors, purported access to private companies which the average investor would not typically have access to.
On the flip side, investors do not know what the investment will be, so there is a high opportunity cost in waiting for a deal to be announced since the invested funds are typically sitting in an escrow account. Sponsors are incentivized to do a deal to receive the promote, even when private companies are expensive.
So, does giving a sponsor a blank check pay off? While there is a wide dispersion of results and a relatively limited dataset, the results are not pretty. From 2019 through early 2020, SPACs had both negative average and median returns in the 3-month, 6-month, and 1-year periods following the completion of a merger; SPACs had worse returns than both the Renaissance IPO Index and Russell 2000 Small Cap Index over all respective periods.[2]
Source: “A Sober Look at SPACs“. Michael Klausner, Michael Ohlrogge, & Emily Ruan, 16-Nov-2020, ssrn.com. Avantis Investors. Data reflects the 2019-2020 merger cohort. Of the 47 SPACs examined, 47 had sufficient history for the three-month period, 38 for the six-month period and 16 for the 12-month period. The IPO Index is the Renaissance IPO Index. The Small Cap Index is the Russell 2000 Index. See Important Disclosure Information.[2]
On the other hand, the SPAC sponsors - which receive the promote - have been rewarded handsomely, with an average 1-year return of 187% and median 1-year return of 32% for sponsors.[2] SPACs appear to be a much better “investment” for sponsors rather than the investors. In an effort to highlight potential risks for investors, the SEC has done the following:
December 2020: Issued guidance regarding SPACs, identifying potential conflicts of interest and disclosure concerns related to SPAC IPOs and subsequent transactions.[3]
March 2021: Issued an Investor Alert that states, “Never invest in a SPAC based solely on a celebrity’s involvement or based solely on other information you receive through social media, investment newsletters, online advertisements, email, investment research websites, internet chat rooms, direct mail, newspapers, magazines, television, or radio.“[4]
March 2021: Has opened an inquiry into SPACs and is seeking information on how underwriters are managing the risks involved.[5]
Investor beware.
So before investing in the next hot SPAC deal, it may be wise to reconsider who you are giving your blank check to. We think that most investors would instead be better off over the long-term using a science-based, low-cost, broadly-diversified investing strategy such as MarketPlus Investing®.
If you have any questions about SPACs or your investments, please reach out to us. We are happy to listen and assist.
Important Disclosure Information And Sources:
[1] “SPAC Statistics“. SPACInsider, 23-Mar-2021, spacinsider.com.
[2] “A Sober Look at SPACs“. Michael Klausner, Michael Ohlrogge, & Emily Ruan, 16-Nov-2020, ssrn.com. The Renaissance IPO Index® (IPOUSA) is a stock market index based upon a portfolio of U.S.-listed newly public companies that includes securities prior to their inclusion in core U.S. equity portfolios. The Russell 2000 Index measures the performance of the 2,000 smaller companies that are included in the Russell 3000 Index, which itself is made up of nearly all U.S. stocks.
[3] “Special Purpose Acquisition Companies: CF Disclosure Guidance: Topic No. 11“. U.S. Securities and Exchange Commission, 22-Dec-2020, sec.gov.
[4] “Celebrity Involvement with SPACs – Investor Alert“. U.S. Securities and Exchange Commission, 10-Mar-2021, sec.gov.
[5] “U.S. regulator opens inquiry into Wall Street's blank check IPO frenzy“. Jody Godoy & Chris Prentice, 24-Mar-2021, reuters.com.
There is no guarantee investment strategies will be successful. Past performance is no guarantee of future results. Diversification neither assures a profit nor guarantees against a loss in a declining market.
Statements contained in this report that are not statements of historical fact are intended to be and are forward looking statements. Forward looking statements include expressed expectations of future events and the assumptions on which the expressed expectations are based. All forward looking statements are inherently uncertain as they are based on various expectations and assumptions concerning future events and they are subject to numerous known and unknown risks and uncertainties which could cause actual events or results to differ materially from those projected.
Advisory services are provided by SJS Investment Services, a registered investment advisor (RIA) with the SEC. Registration does not imply a certain level of skill or training. This material has been prepared for informational purposes only.
MarketPlus Investing® models consist of institutional quality registered investment companies. Investment values will fluctuate, and shares, when redeemed, may be worth more or less than original cost.
Hyperlinks to third-party information are provided as a convenience and we disclaim any responsibility for information, services or products found on websites or other information linked hereto.
Suggested Reading
While You Weren't Sleeping - Performance Of Markets In 2020
Ignorance is bliss. At least that’s how we feel about the markets in 2020. The person who did not look at the news or troubles of the world was rewarded with an incredible year in the markets.
By SJS Chief Investment Officer Tom Kelly, CFA.
Ignorance is bliss. At least that’s how we feel about the markets in 2020. The person who did not look at the news or troubles of the world was rewarded with an incredible year in the markets. A good investment approach to 2020 would have been to fall asleep on January 1 and wake up on December 31, with a sleepwalk or two consisting of tax harvesting and rebalancing along the way.
Don’t get us wrong—we know that 2020 brought challenges for many, many people. But if we had told you at the beginning of the year that 2020 would bring a global pandemic that would cripple the U.S. gross domestic product (GDP) by 31% in the second quarter, cause 20 million lost jobs in April, and lead to a contested presidential election in November, chances are you would have sold all your stock.[1][2][3] You and us both!
![Source: Dimensional Fund Advisors. See Important Disclosure Information [4] for index information.](https://images.squarespace-cdn.com/content/v1/5ee8ee8eb4fb337e3b806c1e/1610997932869-OYI16YSTUDTC7TE3P5IF/2021.01.22+2020+Global+Asset+Class+Returns.JPG)
Source: Dimensional Fund Advisors. See Important Disclosure Information [4] for index information.
But that is indeed what happened, and it sure would have been foolish to be wise. In 2020, the broad U.S. stock market went up over 20% and international markets went up over 7%; even bonds had strong positive returns. About the only thing that didn’t go up is real estate, which went down 9% for the year, but ended strong with a 12% return in the fourth quarter. The benefits of a well-diversified portfolio were realized as well, with large caps and small caps trading punches as the months rolled on but sharing similar total year results.[4]
While 2020 was nowhere near perfect, we hope it allowed you to grow closer to loved ones, appreciate the little conveniences a little more, and become a bit more resilient with whatever comes your way. Who knows what’s in store for 2021? Whatever it brings, leave the worrying to us, knowing that your MarketPlus Portfolio is battle tested, incorporating academic advances in portfolio design with our 25-plus years of real-world investment experience to help you achieve your specific financial goals.
Important Disclosure Information and Sources:
[1] “Gross Domestic Product.” U.S. Bureau of Economic Analysis, bea.gov.
[2] “Payroll employment down 20.5 million in April 2020.” U.S. Bureau of Labor Statistics, 12-May-2020, bls.gov.
[3] “Electoral College makes it official: Biden won, Trump lost.” Mark Sherman, 14-Dec-2020, apnews.com.
[4] Source: Dimensional Fund Advisors, Morningstar. Market segment (index representation) as follows: US Stock Market (Russell 3000 Index), International Developed Stocks (MSCI World ex USA Index [net div.]), Emerging Markets (MSCI Emerging Markets Index [net div.]), Global Real Estate (S&P Global REIT Index [net div.]), US Bond Market (Bloomberg Barclays US Aggregate Bond Index), and Global Bond Market ex US (Bloomberg Barclays Global Aggregate ex-USD Bond Index [hedged to USD]).
There is no guarantee investment strategies will be successful. Past performance is no guarantee of future results. Indices are not available for direct investment. Their performance does not reflect the expenses associated with management of an actual portfolio. In US dollars. The index performance figures assume the reinvestment of all income, including dividends and capital gains.
Hyperlinks to third-party information are provided as a convenience and we disclaim any responsibility for information, services or products found on websites or other information linked hereto.
Suggested Reading
How Will The Presidential Election Impact Your Investments?
Based on our research, we believe your portfolio allocation and the discipline to stick to it are far more important to your results than who is President.
By SJS Senior Client Portfolio Manager Tom Kelly, CFA.
We at SJS are constantly discussing the markets – how they’ve been doing, where they’re going, what we’re doing about it. Recently, the conversations have surrounded the upcoming election and our views on how one particular outcome might affect the markets. While it makes for lively discussion, what is more interesting is looking at the actual returns of the S&P 500 during election years and subsequent years that follow.
Source: S&P 500 data. In US dollars. See Important Disclosure Information.
Based on our research such as the graph above, there are no noticeable or statistical patterns on the given year or outcome. It doesn’t seem to matter if the results are expected or unexpected, or whether an elephant or donkey inhabits 1600 Pennsylvania Avenue. On average, stock market returns (as measured by the S&P 500) have been positive both in election years and the year following (and every year for that matter!). What about predicting a subsequent year based on the election year results? Don’t count on that either. The correlation between those two is -0.32 (values at or close to zero imply weak or no relationship), based on the same S&P 500 data used for the graph above.
We dug even further into the data to see if there was discernible trepidation in the 6 months leading up to new presidents, or the November-December months that coincide with election years, as shown in the graph below. Surprisingly, the annualized average return in July-December during election years was 18.6%, compared to 10.6% during non-election years. The months of November and December were great times to be invested in the markets regardless of an election, with the annualized average return for those two months being 19.4% during election years vs. 19.8% during non-election years. We believe your portfolio allocation and the discipline to stick to it are far more important to your investment results than who sits in the White House.
Source: S&P 500 data. In US dollars. See Important Disclosure Information.
The big takeaways from our research are consistent with the MarketPlus Investing’s core fundamentals, primarily that speculating is futile and the stock market rewards investors over the long term. Regardless of the presidential party, policy changes, and the unknown events, we recommend sticking with your MarketPlus designed portfolio to help you reach your goals.
If you have any questions on how the upcoming election may impact your portfolio, please reach out to us. We are always here to listen and assist.
Source: Dimensional Fund Advisors. In US dollars. Growth of wealth shows the growth of a hypothetical investment of $100 in the securities in the Fama / French US Total Market Research Index. See Important Disclosure Information.
Important Disclosure Information and Sources
There is no guarantee investment strategies will be successful. Past performance is no guarantee of future results. Diversification neither assures a profit nor guarantees against a loss in a declining market.
Hyperlinks to third-party information are provided as a convenience and we disclaim any responsibility for information, services or products found on websites or other information linked hereto.
Indices are not available for direct investment. Their performance does not reflect the expenses associated with management of an actual portfolio. In US dollars. The index performance figures assume the reinvestment of all income, including dividends and capital gains. The performance of the indices was obtained from published sources believed to be reliable but which are not warranted as to accuracy or completeness.
The S&P 500 Index is a free float-adjusted market-capitalization-weighted index of 500 of the largest publicly traded companies in the United States. Source: S&P data © 2020 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.
The growth of wealth chart begins with the start of the first full presidential term (March 4, 1929) for which Fama / French Total US Market Research Index data is available and ends on June 30, 2020. Data presented in the growth of wealth chart is hypothetical and assumes reinvestment of income and no transaction costs or taxes. The chart is for illustrative purposes only and is not indicative of any investment.
The Fama / French Total US Market Research Index is a value-weighed US market index is constructed every month, using all issues listed on the NYSE, AMEX, or Nasdaq with available outstanding shares and valid prices for that month and the month before. Exclusions: American depositary receipts. Sources: CRSP for value-weighted US market return. Rebalancing: Monthly. Dividends: Reinvested in the paying company until the portfolio is rebalanced.