Given the state of the markets, we thought it may be helpful to give an update as it relates to investment returns and a provide a brief outlook.
Given the recent volatility, it is easy to lose sight of the relative strength that we have seen in the markets over the period of September 30, 2022 through September 30, 2023. It may come as a surprise that for the one-year period ending September 30th 2023, the markets have experienced significant increases as illustrated in the chart below:
While the US stock market is up +20.46% over the last 12 months, it has not yet fully recovered to the 2022 market highs. Although the calendar year so far in 2023 has provided mixed results, large strides have been made from the March – October 2022 timeframe, when most of the declines occurred. International markets have also provided strong returns, slightly outperforming US stocks at +24.00% during this period. Global real estate, having only increased +2.03% has more time go before it experiences a rebound, but it will occur at some point. Lastly, bonds, have not generated much of a return over the last 12 months but dividend yields are now between 4-6% and are significantly higher than they have been at any point since prior to the 2008 financial crisis. These higher rates may come down at some point, but due to the inverse relationships of dividends and bond prices, prices would rise if yields come down and would help their overall results when that occurs.
Clients may recall our strategy in 2022 was to buy into the markets during the market decline, having done so 6-8 times, while at a relative low point. Most of this movement was taking funds from the domestic large value asset class, which had only dropped about 2-4% for the year, and buying into domestic large growth which had dropped over -30%. This has worked out about as well as could have been expected now that the large company growth asset class has increased by almost +30% since last October. The next important step in the process is for us to start taking some of these profits! (For additional detail on US stock market asset class performance for the trailing 12 months, please click here.)
Cash is yielding about 5% and is nice for short-term investments, but as illustrated, has significantly underperformed the broad stock market. This obviously will not always be the case in any 12 month period, such as during the calendar year 2022, but over the long term cash does not provide as much reward as stock and bond investments. (Click on this Asset Class Performance Summary for information on long-term market performance.) For example, from 1973 to 2022, large company stocks have averaged +11.64%, small company stocks have averaged +13.68%, international stocks +10.44%, etc. Cash, which usually provides similar returns as inflation, has been around +4% over the time illustrated.
The question we most often receive is whether the markets will continue to advance. While we do not profess to have a crystal ball, the longer the timeframe one has to invest, the odds are always in favor of the investor. The markets are now by definition in “bull market” territory since they have advanced over 20%. However, for the first year after a “bear market”, the advances have been one of the weakest since World War II. It is reasonable to expect that the markets will at some point experience a full recovery and revert back to higher returns that we have seen over the decades. As is often the case, patience is a virtue!
If you have any questions, as always, please do not hesitate to contact us.
Total Wealth Planning Investment Policy Committee