Q4 Quarterly Market Review - Fourth Quarter 2018 - Wealth Advisors Group
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Q4
Quarterly Market Review
Fourth Quarter 2018
Quarterly Market Review
Fourth Quarter 2018
This report features world capital market performance and a Overview:
timeline of events for the past quarter. It begins with a global
overview, then features the returns of Market Summary
stock and bond asset classes in the US and
international markets. World Stock Market Performance
The report also illustrates the impact of globally diversified World Asset Classes
portfolios and features a quarterly topic.
US Stocks
International Developed Stocks
Emerging Markets Stocks
Select Country Performance
Select Currency Performance vs. US Dollar
Real Estate Investment Trusts (REITs)
Commodities
Fixed Income
Global Fixed Income
Impact of Diversification
Quarterly Topic: Why Should You Diversify?
2Quarterly Market Summary
Index Returns
Global
International Emerging Global Bond
US Stock Developed Markets Real US Bond Market
Market Stocks Stocks Estate Market ex US
Q4 2018 STOCKS BONDS
-14.30% -12.78% -7.47% -5.79% 1.64% 1.89%
Since Jan. 2001
Avg. Quarterly Return 1.8% 1.3% 2.8% 2.4% 1.1% 1.1%
Best 16.8% 25.9% 34.7% 32.3% 4.6% 4.6%
Quarter
2009 Q2 2009 Q2 2009 Q2 2009 Q3 2001 Q3 2008 Q4
Worst -22.8% -21.2% -27.6% -36.1% -3.0% -2.7%
Quarter
2008 Q4 2008 Q4 2008 Q4 2008 Q4 2016 Q4 2015 Q2
Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio.
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]). S&P data © 2019 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell
Indexes. MSCI data © MSCI 2019, all rights reserved. Bloomberg Barclays data provided by Bloomberg. 3Long-Term Market Summary
Index Returns
Global
International Emerging Global Bond
US Stock Developed Markets Real US Bond Market
Market Stocks Stocks Estate Market ex US
1 Year STOCKS BONDS
-5.24% -14.09% -14.58% -5.90% 0.01% 3.17%
5 Years
7.91% 0.34% 1.65% 5.28% 2.52% 4.11%
10 Years
13.18% 6.24% 8.02% 10.05% 3.48% 3.98%
Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio.
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]). S&P data © 2019 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell
Indexes. MSCI data © MSCI 2019, all rights reserved. Bloomberg Barclays data provided by Bloomberg. 4World Stock Market Performance
MSCI All Country World Index with selected headlines from Q4 2018
270
260
250
240
230
220
210
Sep 30 Oct 31 Nov 30 Dec 31
“US Unemployment “Mortgage “Eurozone Growth “Midterm Elections “US Stocks Hit “US, Mexico, “Oil Prices Drop “May Survives a
Rate Falls to Rates Fast Stutters as US Produce a Divided Hard as Tech and Canada Sharply as Party Revolt, But
Lowest Level Approaching Economy Powers Congress” Worries Deepen” Sign Pact to OPEC Brexit’s Path Is
Since 1969” 5%, a Fresh Ahead” Replace Struggles to Unclear”
Blow to NAFTA” Agree on Cuts”
Housing
Market”
“IMF Lowers Global “US Government “Wages Rise at “Japanese Economy “Existing-Home “French “Small-Cap Stocks “US Indexes Close
Growth Forecasts Deficit Grew 17% Fastest Rate in Shrinks as Natural Sales Suffer Antigovernment Teeter on the with Worst Yearly
for 2018 and 2019” in Fiscal 2018” Nearly a Decade Disasters Take a Largest Annual Protest Plunges Edge of a Bear Losses Since 2008”
as Hiring Jumps” Toll” Drop in Four Years” Paris in Havoc” Market”
These headlines are not offered to explain market returns. Instead, they serve as a reminder that investors should view daily events from a long-term perspective and avoid making
investment decisions based solely on the news.
Graph Source: MSCI ACWI Index [net div.]. MSCI data © MSCI 2019, all rights reserved.
It is not possible to invest directly in an index. Performance does not reflect the expenses associated with management of an actual portfolio. Past performance is not a guarantee of future results. 5World Stock Market Performance
MSCI All Country World Index with selected headlines from past 12 months
LONG TERM (2000-Q4 2018)
300
SHORT TERM (Q1 2018–Q4 2018)
200
Last 12
270 100
months
0
2000 2005 2010 2015
260
250
240
230
220
210
Dec 31 Mar 31 Jun 30 Sep 30 Dec 31
“Nasdaq Crests “Congress Passes “Trump Pulls “Inflation Rate “Profits Surge “China’s Trade “US “Midterm “Oil Prices Drop
7000 as Tech Mammoth US Out of Hits Six-Year at Big US Surplus with Unemployment Elections Sharply as
Giants Roar Spending Bill, Iran Deal” High in May” Firms” US Hits New Rate Falls to Produce a OPEC Struggles
Into 2018” Averts Shutdown” Record” Lowest Level Divided to Agree on
Since 1969” Congress” Cuts”
“US Imposes “Yield on 10-Year “US, China Tariffs “US Jobless “Nasdaq Crosses “Fed Raises “Eurozone “Existing-Home “US Indexes
New Tariffs, US Government Hit American- Claims Hit 8000 Threshold Interest Rates, Growth Sales Suffer Close with
Ramping Up Bond Hits 3% for Made Products Lowest Level for First Time” Signals One Stutters as Largest Annual Worst Yearly
'America First' First Time in Years” from Chips to since 1969” More Increase US Economy Drop in Four Losses Since
Trade Policy” Cars” This Year” Powers Years” 2008”
Ahead”
These headlines are not offered to explain market returns. Instead, they serve as a reminder that investors should view daily events from a long-term perspective and avoid making
investment decisions based solely on the news.
Graph Source: MSCI ACWI Index [net div.]. MSCI data © MSCI 2019, all rights reserved.
It is not possible to invest directly in an index. Performance does not reflect the expenses associated with management of an actual portfolio. Past performance is not a guarantee of future results. 6World Asset Classes
Fourth Quarter 2018 Index Returns (%)
Equity markets around the world posted negative returns for the quarter. Looking at broad market indices, emerging markets outperformed developed
markets, including the US.
Value stocks were positive vs. growth stocks in all markets, including the US. Small caps underperformed large caps in the US and non-US developed
markets but outperformed in emerging markets.
REIT indices outperformed equity market indices in both the US and non-US developed markets.
Bloomberg Barclays US Aggregate Bond Index 1.64
One-Month US Treasury Bills 0.56
S&P Global ex US REIT Index (net div.) -4.68
Dow Jones US Select REIT Index -6.61
MSCI Emerging Markets Value Index (net div.) -6.75
MSCI Emerging Markets Small Cap Index (net div.) -7.18
MSCI Emerging Markets Index (net div.) -7.47
MSCI All Country World ex USA Index (net div.) -11.46
Russell 1000 Value Index -11.72
MSCI World ex USA Value Index (net div.) -12.05
MSCI World ex USA Index (net div.) -12.78
S&P 500 Index -13.52
Russell 1000 Index -13.82
Russell 3000 Index -14.30
MSCI World ex USA Small Cap Index (net div.) -16.16
Russell 2000 Value Index -18.67
Russell 2000 Index -20.20
Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. The
S&P data is provided by Standard & Poor's Index Services Group. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. MSCI data © MSCI 2019, all
rights reserved. Dow Jones data © 2019 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. S&P data © 2019 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. Bloomberg
Barclays data provided by Bloomberg. Treasury bills © Stocks, Bonds, Bills, and Inflation Yearbook™, Ibbotson Associates, Chicago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield). 7US Stocks
Fourth Quarter 2018 Index Returns
US equities underperformed both non-US developed and Ranked Returns for the Quarter (%)
emerging markets.
Large Value -11.72
Value outperformed growth in the US across large and small
cap stocks. Large Cap -13.82
Marketwide -14.30
Small caps underperformed large caps in the US.
Large Growth -15.89
Small Value -18.67
Small Cap -20.20
Small Growth -21.65
World Market Capitalization—US Period Returns (%) * Annualized
Asset Class 1 Year 3 Years** 5 Years** 10 Years**
Large Growth -1.51 11.15 10.40 15.29
Large Cap -4.78 9.09 8.21 13.28
54%
US Market
Marketwide
Large Value
-5.24
-8.27
8.97
6.95
7.91
5.95
13.18
11.18
$25.1 trillion Small Growth -9.31 7.24 5.13 13.52
Small Cap -11.01 7.36 4.41 11.97
Small Value -12.86 7.37 3.61 10.40
Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio.
Market segment (index representation) as follows: Marketwide (Russell 3000 Index), Large Cap (Russell 1000 Index), Large Cap Value (Russell 1000 Value Index), Large Cap Growth (Russell 1000 Growth Index), Small Cap
(Russell 2000 Index), Small Cap Value (Russell 2000 Value Index), and Small Cap Growth (Russell 2000 Growth Index). World Market Cap represented by Russell 3000 Index, MSCI World ex USA IMI Index, and MSCI
Emerging Markets IMI Index. Russell 3000 Index is used as the proxy for the US market. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. MSCI
data © MSCI 2019, all rights reserved. 8International Developed Stocks
Fourth Quarter 2018 Index Returns
In US dollar terms, developed markets outside the US Ranked Returns for the Quarter (%) Local currency US currency
outperformed the US equity market but underperformed
emerging markets during the quarter.
-11.24
Value
-12.05
Value outperformed growth across large and small cap stocks.
-12.05
Small caps underperformed large caps in non-US Large Cap
-12.78
developed markets.
-12.81
Growth
-13.48
-15.71
Small Cap
-16.16
World Market Capitalization—International Developed Period Returns (%) * Annualized
Asset Class 1 Year 3 Years** 5 Years** 10 Years**
Growth -13.14 2.84 1.36 6.74
Large Cap -14.09 3.11 0.34 6.24
34%
International
Value
Small Cap
-15.06
-18.07
3.36
3.85
-0.73
2.25
5.69
10.06
Developed Market
$16.0 trillion
Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio.
Market segment (index representation) as follows: Large Cap (MSCI World ex USA Index), Small Cap (MSCI World ex USA Small Cap Index), Value (MSCI World ex USA Value Index), and Growth (MSCI World ex USA
Growth Index). All index returns are net of withholding tax on dividends. World Market Cap represented by Russell 3000 Index, MSCI World ex USA IMI Index, and MSCI Emerging Markets IMI Index. MSCI World ex USA IMI
Index is used as the proxy for the International Developed market. MSCI data © MSCI 2019, all rights reserved. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the
Russell Indexes. 9Emerging Markets Stocks
Fourth Quarter 2018 Index Returns
In US dollar terms, emerging markets outperformed developed Ranked Returns for the Quarter (%) Local currency US currency
markets, including the US.
Value outperformed growth across large and small cap stocks. -6.68
Value
-6.75
Small caps outperformed large caps.
-7.29
Small Cap
-7.18
-7.43
Large Cap
-7.47
-8.19
Growth
-8.22
World Market Capitalization—Emerging Markets Period Returns (%) * Annualized
Asset Class 1 Year 3 Years** 5 Years** 10 Years**
Value -10.74 9.52 0.51 6.99
Large Cap -14.58 9.25 1.65 8.02
12%
Emerging Markets
Growth
Small Cap
-18.26
-18.59
8.89
3.68
2.67
0.95
8.97
9.87
$5.4 trillion
Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio.
Market segment (index representation) as follows: Large Cap (MSCI Emerging Markets Index), Small Cap (MSCI Emerging Markets Small Cap Index), Value (MSCI Emerging Markets Value Index), and Growth (MSCI
Emerging Markets Growth Index). All index returns are net of withholding tax on dividends. World Market Cap represented by Russell 3000 Index, MSCI World ex USA IMI Index, and MSCI Emerging Markets IMI Index. MSCI
Emerging Markets IMI Index used as the proxy for the emerging market portion of the market. MSCI data © MSCI 2019, all rights reserved. Frank Russell Company is the source and owner of the trademarks, service marks,
and copyrights related to the Russell Indexes. 10Select Country Performance
Fourth Quarter 2018 Index Returns
In US dollar terms, New Zealand and Hong Kong recorded the highest country performance in developed markets, while Austria and Norway posted the
lowest returns for the quarter. In emerging markets, Brazil and Indonesia recorded the highest country performance, while Columbia and Pakistan posted
the lowest performance.
Ranked Developed Markets Returns (%) Ranked Emerging Markets Returns (%)
New Zealand -4.34 Brazil 14.28
Hong Kong -5.03 Indonesia 8.28
Singapore -6.26 Qatar 7.54
Spain -9.73 Hungary 5.80
Switzerland -9.93 Philippines 5.46
Australia -10.75 Turkey 3.44
Denmark -11.41 India 3.20
Netherlands -11.69 Poland -2.88
UK -12.66 Peru -3.05
Italy -12.98 South Africa -3.90
Israel -13.35 UAE -5.98
Portugal -13.49 Malaysia -7.03
Sweden -14.13 Chile -8.40
Japan -14.36 Russia -9.04
US -14.45 Czech Republic -9.17
Finland -14.64 Egypt -9.37
France -15.48 China -10.76
Canada -15.60 Thailand -11.95
Germany -15.83 Taiwan -13.01
Ireland -16.44 Korea -13.19
Belgium Greece -14.11
-16.53
Mexico -19.10
Austria -18.95
Colombia -19.69
Norway -20.48
Pakistan -21.02
Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio.
Country performance based on respective indices in the MSCI World ex US IMI Index (for developed markets), MSCI USA IMI Index (for US), and MSCI Emerging Markets IMI Index. All returns in USD and net of withholding
tax on dividends. MSCI data © MSCI 2019, all rights reserved. UAE and Qatar have been reclassified as emerging markets by MSCI, effective May 2014. 11Select Currency Performance vs. US Dollar
Fourth Quarter 2018
In developed markets, currencies mostly depreciated vs. the US dollar with a few exceptions, including the Japanese yen, which appreciated over 3.5%. In
emerging markets, currencies were mixed against the US dollar, ranging from +12% to –10%.
Ranked Developed Markets (%) Ranked Emerging Markets (%)
Japanese yen (JPY) 3.53 Turkish lira (TRY) 12.92
Indian rupee (INR) 3.83
New Zealand dollar (NZD) 1.15 Indonesia rupiah (IDR) 3.63
Swedish krona (SEK) Brazilian real (BRL) 3.04
0.31
Philippine peso (PHP) 2.75
Singapore dollar (SGD) 0.25 Chinese yuan (CNY) 0.22
Malaysian ringgit (MYR) 0.15
Hong Kong dollar (HKD) -0.06
Egyptian pound (EGP) 0.00
Swiss franc (CHF) -0.91 South Korean won (KRW) -0.59
Taiwanese NT dollar (TWD) -0.66
Euro (EUR) -1.58
Thailand baht (THB) -0.68
Danish krone (DKK) -1.65 Hungary forint (HUF) -0.77
Czech koruna (CZK) -1.41
British pound (GBP) -2.34
South African rand (ZAR) -1.62
Israel shekel (ILS) -2.69 Poland zloty (PLN) -1.88
Peru sol (PEN) -2.36
Australian dollar (AUD) -2.70
Chilean peso (CLP) -4.96
Canadian dollar (CAD) -5.36 Mexican peso (MXN) -5.05
Russian ruble (RUB) -5.59
Norwegian krone (NOK) -5.96
Colombian peso (COP) -8.56
Pakistani rupee (PKR) -10.53
Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio.
MSCI data © MSCI 2019, all rights reserved. 12Real Estate Investment Trusts (REITs)
Fourth Quarter 2018 Index Returns
Non-US real estate investment trusts outperformed US REITs Ranked Returns for the Quarter (%)
in US dollar terms.
Global REITS (ex US) -4.68
US REITS -6.61
Total Value of REIT Stocks Period Returns (%) * Annualized
Asset Class 1 Year 3 Years** 5 Years** 10 Years**
US REITS -4.22 1.97 7.89 12.05
42% 58% Global REITS -7.42 3.35 3.39 8.94
US
World ex US $601 billion
$436 billion 97 REITs
245 REITs
(22 other
countries)
Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio.
Number of REIT stocks and total value based on the two indices. All index returns are net of withholding tax on dividends. Total value of REIT stocks represented by Dow Jones US Select REIT Index and the S&P Global ex US
REIT Index. Dow Jones US Select REIT Index used as proxy for the US market, and S&P Global ex US REIT Index used as proxy for the World ex US market. Dow Jones and S&P data © 2019 S&P Dow Jones Indices LLC, a
division of S&P Global. All rights reserved. 13Commodities
Fourth Quarter 2018 Index Returns
The Bloomberg Commodity Index Total Return declined 9.41% Ranked Returns for Individual Commodities (%)
during the fourth quarter of 2018, bringing the total annual
return to –11.25%. Sugar 7.41
Gold 6.59
Sugar led quarterly performance with a gain of 7.41%. Energy Silver 4.72
was the worst-performing complex, with WTI crude oil and Soybeans 2.73
unleaded gas declining by 37.87% and 37.78%, respectively. Corn 2.12
Live cattle 1.33
Natural gas -0.63
Soybean meal -1.07
Lean hogs -2.96
Wheat -3.08
Coffee -3.73
Zinc -4.38
Soybean oil -5.52
Period Returns (%) * Annualized Copper -6.77
Asset Class QTR 1 Year 3 Years** 5 Years** 10 Years** Cotton -7.50
Kansas wheat -8.50
Commodities -9.41 -11.25 0.30 -8.80 -3.78
Aluminum -11.43
Nickel -15.66
Heating oil -28.38
Brent crude oil -34.99
Unleaded gas -37.78
WTI crude oil -37.87
Past performance is not a guarantee of future results. Index is not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio.
Commodities returns represent the return of the Bloomberg Commodity Total Return Index. Individual commodities are sub-index values of the Bloomberg Commodity Total Return Index. Data provided by Bloomberg. 14Fixed Income
Fourth Quarter 2018 Index Returns
Interest rate changes across the US US Treasury Yield Curve (%) Bond Yield across Issuers (%)
fixed income market were mixed during
the fourth quarter of 2018. The yield on 4.00 4.36
the 5-year Treasury note declined 43 9/28/2018
3.30 3.52
basis points (bps), ending the quarter at 3.00 12/31/2018
2.51%. The yield on the 10-year 2.69
12/31/2017
Treasury note decreased 36 bps to 2.00
2.69%. The 30-year Treasury bond yield
1.00
decreased 17 bps to finish at 3.02%. For
2018, yields on the 10-year Treasury
0.00
and 30-year Treasury increased 29 bps 10-Year US State and AAA-AA A-BBB
and 28 bps, respectively. 1 5 10 30 Treasury Local Corporates Corporates
Yr Yr Yr Yr Municipals
In terms of total returns, short-term
corporate bonds increased 0.78% during Period Returns (%) *Annualized
the quarter. Intermediate-term corporate
Asset Class QTR 1 Year 3 Years** 5 Years** 10 Years**
bonds had a total return of 0.58%.
Bloomberg Barclays US Government Bond Index Long 4.16 -1.79 2.63 5.90 4.15
Bloomberg Barclays Municipal Bond Index 1.69 1.28 2.30 3.82 4.85
Total returns for short-term municipal
Bloomberg Barclays US Aggregate Bond Index 1.64 0.01 2.06 2.52 3.48
bonds were 1.10% for the quarter.
FTSE World Government Bond Index 1-5 Years (hedged to USD) 1.53 2.12 1.58 1.53 1.69
Intermediate-term municipal bonds
FTSE World Government Bond Index 1-5 Years 0.94 -0.76 1.56 -0.82 0.29
returned 2.00%.
ICE BofAML 1-Year US Treasury Note Index 0.78 1.86 1.06 0.70 0.62
ICE BofAML US 3-Month Treasury Bill Index 0.56 1.87 1.02 0.63 0.37
Bloomberg Barclays US TIPS Index -0.42 -1.26 2.11 1.69 3.64
Bloomberg Barclays US High Yield Corporate Bond Index -4.53 -2.08 7.23 3.83 11.12
One basis point equals 0.01%. Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the
management of an actual portfolio. Yield curve data from Federal Reserve. State and local bonds are from the S&P National AMT-Free Municipal Bond Index. AAA-AA Corporates represent the Bank of America Merrill Lynch
US Corporates, AA-AAA rated. A-BBB Corporates represent the ICE BofAML Corporates, BBB-A rated. Bloomberg Barclays data provided by Bloomberg. US long-term bonds, bills, inflation, and fixed income factor data ©
Stocks, Bonds, Bills, and Inflation (SBBI) Yearbook™, Ibbotson Associates, Chicago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield). FTSE fixed income indices © 2019 FTSE Fixed Income LLC, all rights
reserved. ICE BofAML index data © 2019 ICE Data Indices, LLC. S&P data © 2019 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. 15Global Fixed Income
Fourth Quarter 2018 Yield Curves
Interest rates in the global developed US UK
markets generally decreased during
the quarter. 4.0 4.0
9/30/2018
3.0 12/31/2018 3.0
Longer-term bonds generally 9/30/2018
2.0 2.0
outperformed shorter-term bonds in the 12/31/2018
Yield (%)
Yield (%)
global developed markets. 1.0 1.0
0.0 0.0
For the year, longer-term bonds
-1.0 -1.0
underperformed shorter-term bonds in 1Y 5Y 10Y 20Y 30Y 1Y 5Y 10Y 20Y 30Y
the US but generally outperformed
shorter-term bonds in the non-US Years to Maturity Years to Maturity
developed markets.
Germany Japan
4.0 4.0
3.0 3.0
2.0 2.0
Yield (%)
Yield (%)
9/30/2018 9/30/2018
1.0 12/31/2018 1.0 12/31/2018
Changes in Yields (bps) since 9/30/2018
1Y 5Y 10Y 20Y 30Y 0.0 0.0
US -4.2 -44.0 -35.5 -24.4 -17.6
-1.0 -1.0
UK -2.3 -26.9 -25.2 -11.6 -9.3 1Y 5Y 10Y 20Y 30Y 1Y 5Y 10Y 20Y 30Y
Germany -15.2 -18.9 -21.8 -18.9 -19.6
Japan -1.6 -9.3 -14.2 -14.6 -16.3 Years to Maturity Years to Maturity
One basis point equals 0.01%. Source: ICE BofAML government yield. ICE BofAML index data © 2019 ICE Data Indices, LLC. 16Impact of Diversification
Fourth Quarter 2018 Index Returns
These portfolios illustrate the performance of different global Ranked Returns (%)
stock/bond mixes and highlight the benefits of diversification.
100% Treasury Bills 0.56
Mixes with larger allocations to stocks are considered riskier
but have higher expected returns over time. 25/75
-2.81
50/50
-6.14
75/25
-9.42
100% Stocks
-12.65
Growth of Wealth: The Relationship between Risk and Return
$120,000 Stock/Bond Mix
$100,000
Period Returns (%) * Annualized 100% Stocks
10-Year $80,000
Asset Class 1 Year 3 Years** 5 Years**10 Years** STDEV¹ 75/25
100% Treasury Bills 1.81 0.93 0.57 0.32 0.16 $60,000
50/50
25/75 -0.82 2.57 1.73 2.88 3.65
$40,000 25/75
50/50 -3.49 4.16 2.82 5.36 7.32
100% Treasury Bills
75/25 -6.19 5.70 3.86 7.75 10.98 $20,000
100% Stocks -8.93 7.18 4.82 10.05 14.65
$0
12/1988 12/1993 12/1998 12/2003 12/2008 12/2013 12/2018
1. STDEV (standard deviation) is a measure of the variation or dispersion of a set of data points. Standard deviations are often used to quantify the historical return volatility of a security or portfolio.
Diversification does not eliminate the risk of market loss. Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect expenses associated with the
management of an actual portfolio. Asset allocations and the hypothetical index portfolio returns are for illustrative purposes only and do not represent actual performance. Global Stocks represented by MSCI All Country World
Index (gross div.) and Treasury Bills represented by US One-Month Treasury Bills. Globally diversified allocations rebalanced monthly, no withdrawals. Data © MSCI 2019, all rights reserved. Treasury bills © Stocks, Bonds,
Bills, and Inflation Yearbook™, Ibbotson Associates, Chicago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield). 17Why Should You Diversify?
Fourth Quarter 2018
As 2019 approaches, and with US stocks outperforming non-US stocks in recent years,
some investors have again turned their attention towards the role that global diversification plays in their portfolios.
For the five-year period ending October 31, 2018, THERE’S A WORLD OF OPPORTUNITY IN the US. Non-US stocks, including developed and
the S&P 500 Index had an annualized return of EQUITIES emerging markets, account for 48% of world
11.34% while the MSCI World ex USA Index The global equity market is large and represents a market capitalization¹ and represent thousands of
returned 1.86%, and the MSCI Emerging Markets world of investment opportunities. As shown in companies in countries all over the world. A
Index returned 0.78%. As US stocks have Exhibit 1, nearly half of the investment portfolio investing solely within the US would not
outperformed international and emerging markets opportunities in global equity markets lie outside be exposed to the performance of those markets.
stocks over the last several years, some investors
might be reconsidering the benefits of investing
outside the US. Exhibit 1. World Equity Market Capitalization
While there are many reasons why a US-based
investor may prefer a degree of home bias in their
equity allocation, using return differences over a
relatively short period as the sole input into this
decision may result in missing opportunities that
the global markets offer. While international and
emerging markets stocks have delivered
disappointing returns relative to the US over the
last few years, it is important to remember that:
• Non-US stocks help provide valuable
diversification benefits.
• Recent performance is not a reliable indicator
of future returns.
As of December 31, 2017. Data provided by Bloomberg. Market cap data is free-float adjusted and meets minimum liquidity and listing
requirements. China market capitalization excludes A-shares, which are generally only available to mainland China investors. For educational
purposes; should not be used as investment advice.
1. The total market value of a company’s outstanding shares, computed as price times shares outstanding. 18Why Should You Diversify?
(continued from page 18)
THE LOST DECADE PICK A COUNTRY?
We can examine the potential opportunity cost associated with failing to Are there systematic ways to identify which countries will outperform others in
diversify globally by reflecting on the period in global markets from 2000–2009. advance? Exhibit 3 illustrates the randomness in country equity market
During this period, often called the “lost decade” by US investors, the S&P 500 rankings (from highest to lowest) for 22 different developed market countries
Index recorded its worst ever 10-year performance with a total cumulative over the past 20 years. This graphic conveys how difficult it would be to
return of –9.1%. However, looking beyond US large cap equities, conditions execute a strategy that relies on picking the best country and the resulting
were more favorable for global equity investors as most equity asset classes importance of diversification.
outside the US generated positive returns over the course of the decade. (See
Exhibit 2.) Expanding beyond this period and looking at performance for each In addition, concentrating a portfolio in any one country can expose investors
of the 11 decades starting in 1900 and ending in 2010, the US market to large variations in returns. The difference between the best- and
outperformed the world market in five decades and underperformed in the worst-performing countries can be significant. For example, since 1998, the
other six.² This further reinforces why an investor pursuing the equity premium average return of the best-performing developed market country was
should consider a global allocation. By holding a globally diversified portfolio, approximately 44%, while the average return of the worst-performing country
investors are positioned to capture returns wherever they occur. was approximately –16%. Diversification means an investor’s portfolio is
unlikely to be the best or worst performing relative to any individual country,
but diversification also provides a means to achieve a more consistent
Exhibit 2. Global Index Returns, January 2000–December 2009 outcome and more importantly helps reduce and manage catastrophic losses
that can be associated with investing in just a small number of stocks or a
single country.
A DIVERSIFIED APPROACH
Over long periods of time, investors may benefit from consistent exposure in
their portfolios to both US and non-US equities. While both asset classes offer
the potential to earn positive expected returns in the long run, they may
perform quite differently over short periods. While the performance of different
countries and asset classes will vary over time, there is no reliable evidence
that this performance can be predicted in advance. An approach to equity
investing that uses the global opportunity set available to investors can
provide diversification benefits as well as potentially higher expected returns.
S&P data © 2019 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. MSCI
data © MSCI 2019, all rights reserved. Indices are not available for direct investment. Index
performance does not reflect expenses associated with the management of an actual portfolio. Past
performance is not a guarantee of future results.
2. Source: Annual country index return data from the Dimson-Marsh-Staunton (DMS) Global Returns Data, provided by Morningstar, Inc. 19Why Should You Diversify?
(continued from page 19)
Exhibit 3. Equity Returns of Developed Markets
Source: MSCI country indices (net dividends) for each country listed. Does not include Israel, which
MSCI classified as an emerging market prior to May 2010. MSCI data © MSCI 2019, all rights reserved.
Past performance is no guarantee of future results. Indices are not available for direct investment;
therefore, their performance does not reflect the expenses associated with the management of an
actual portfolio.
Source: Dimensional Fund Advisors LP.
Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. Diversification does
not eliminate the risk of market loss.
There is no guarantee investment strategies will be successful. Investing involves risks, including possible loss of principal. Investors should talk to their financial advisor prior to making any investment decision.
All expressions of opinion are subject to change. This article is distributed for informational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or
services. Investors should talk to their financial advisor prior to making any investment decision 20Disclosures A basis point is the smallest measure used in quoting yields or interest rates. One basis point is equal to one one-hundredth of one percentage point (0.01%). There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price. Bond yields are subject to change. Certain call or special redemption features may exist which could impact yield. The price of equity securities may rise, or fall because of changes in the broad market or changes in a company’s financial condition, sometimes rapidly or unpredictably. These price movements may result from factors affecting individual companies, sectors or industries, or the securities market as a whole, such as changes in economic or political conditions. Equity securities are subject to “stock market risk” meaning that stock prices in general may decline over short or extended periods of time. Investments in emerging markets can be more volatile. As mentioned above, the normal risks of investing in foreign countries are heightened when investing in emerging markets. In addition, the small size of securities markets and the low trading volume may lead to a lack of liquidity, which leads to increased volatility. Also, emerging markets may not provide adequate legal protection for private or foreign investment or private property. Investments in commodities may have greater volatility than investments in traditional securities, particularly if the instruments involve leverage. The value of commodity-linked derivative instruments may be affected by changes in overall market movements, commodity index volatility, changes in interest rates, or factors affecting a particular industry or commodity, such as drought, floods, weather, livestock disease, embargoes, tariffs and international economic, political and regulatory developments. Use of leveraged commodity- linked derivatives creates an opportunity for increased return but, at the same time, creates the possibility for greater loss. Real estate investments may be subject to a higher degree of market risk because of concentration in a specific industry, sector or geographical sector. Real estate investments may be subject to risks including, but not limited to, declines in the value of real estate, risks related to general and economic conditions, changes in the value of the underlying property owned by the trust and defaults by borrower. Investing in Real Estate Investment Trusts (REITs) involves special risks such as potential illiquidity and may not be suitable for all investors. There is no assurance that the investment objectives of this program will be attained. International investing involves a greater degree of risk and increased volatility. Changes in currency exchange rates and differences in accounting and taxation policies outside the U.S. can raise or lower returns. Also, some overseas markets may not be as politically and economically stable as the United States and other nations. Treasury inflation-protected securities (TIPS) help eliminate inflation risk to your portfolio as the principal is adjusted semiannually for inflation based on the Consumer Price Index – while providing a real rate of return guaranteed by the U.S. Government. Treasury Inflation-Protected Securities, or TIPS, are subject to market risk and significant interest rate risk as their longer duration makes them more sensitive to price declines associated with higher interest rates. World Market Capitalization refers to the total dollar market value that a country makes up, as a whole of the global markets.
Disclosures All indexes are unmanaged and an individual cannot invest directly in an index Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. Past performance is no guarantee of future results. Russell 1000 Index consists of the 1,000 largest securities in the Russell 3000 Index, which represents approximately 90% of the total market capitalization of the Russell 3000 Index. It is a large-cap, market-oriented index and is highly correlated with the S&P 500 Index. Russell 2000 Index ® measures the performance of the 2,000 smallest companies in the Russell 3000 Index. Russell 3000 Index® measures the performance of the 3,000 largest U.S. companies based on total market capitalization. Russell 1000 Value Index® measures the performance of the large-cap value segment of the U.S. equity universe. It includes those Russell 1000 companies with lower price-to- book ratios and lower expected growth values. The index is unmanaged, includes the reinvestment of dividends and cannot be purchased directly by investors. Russell 2000 Value Index ® measures the performance of those Russell 2000 companies with lower price-to-book ratios and lower forecasted growth values. MSCI World ex USA Index captures large and mid cap representation across 22 of 23 Developed Markets (DM) countries*--excluding the United States. With 1,005 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country. MSCI World ex USA Small Cap Index captures small cap representation across 22 of 23 Developed Markets (DM) countries* (excluding the United States). With 2,437 constituents, the index covers approximately 14% of the free float-adjusted market capitalization in each country. MSCI Emerging Markets Small Cap Index includes small cap representation across 23 Emerging Markets countries*. With 1,792 constituents, the index covers approximately 14% of the free float-adjusted market capitalization in each country. The small cap segment tends to capture more local economic and sector characteristics relative to larger Emerging Markets capitalization segments. MSCI World ex USA Value Index captures large and mid cap securities exhibiting overall value style characteristics across 22 of 23 Developed Markets countries*. The value investment style characteristics for index construction are defined using three variables: book value to price, 12-month forward earnings to price and dividend yield. With 540 constituents, the index targets 50% coverage of the free float-adjusted market capitalization of the MSCI World ex USA Index. MSCI Emerging Markets Value Index captures large and mid cap securities exhibiting overall value style characteristics across 23 Emerging Markets (EM) countries*. The value investment style characteristics for index construction are defined using three variables: book value to price, 12-month forward earnings to price and dividend yield. With 484 constituents, the index targets 50% coverage of the free float-adjusted market capitalization of the MSCI EM Index. MSCI Emerging Markets Index captures large and mid cap representation across 24 Emerging Markets (EM) countries*. With 1,125 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country.
Disclosures MSCI Emerging Markets IndexSM is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets. As of June 2007, the MSCI Emerging Markets Index consisted of the following 25 emerging market country indices: Argentina, Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Israel, Jordan, Korea, Malaysia, Mexico, Morocco, Pakistan, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey. MSCI ACWI (All Country World Index) Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets. As of June 2009 the MSCI ACWI consisted of 45 country indices comprising 23 developed and 22 emerging market country indices. FTSE World Government Bond Index 1-5 Years comprises central government debt from 22 Countries (Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, Netherlands, New Zealand, Norway, Poland, Portugal, Spain, Sweden, Switzerland, UK, and US), denominated in the domicile currency or Euros for Eurozone countries. This particular index has maturity sub-index of 1 to 5 years. S&P 500 Index is widely regarded as the best single gauge of the U.S. equities market. This world renowned index includes a representative sample of 500 leading companies in leading industries of the U.S. economy. Although the S&P 500 Index focuses on the large-cap segment of the market, with approximately 75% coverage of U.S. equities, it is also an ideal proxy for the total market. An investor cannot invest directly in an index. A member of the S&P Global Property Index Series, the S&P Global REIT Index serves as a comprehensive benchmark of publicly traded equity REITs listed in both developed and emerging markets. S&P Global ex-U.S. Property Index defines and measures the investable universe of publicly traded property companies domiciled in developed and emerging markets excluding the U.S. The companies included are engaged in real estate related activities such as property ownership, management, development, rental and investment. Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate and hybrid ARM pass-throughs), ABS and CMBS (agency and non-agency). Provided the necessary inclusion rules are met, US Aggregate eligible securities also contribute to the multi-currency Global Aggregate Index and the US Universal Index, which includes high yield and emerging markets debt. The US Aggregate Index was created in 1986 with history backfilled to January 1, 1976. S&P/Citigroup International Treasury Bond Ex-U.S. 1-3 Years Index is designed to reflect the performance of bonds issues by non-U.S. developed market countries maturing in 1-3 years. Dow Jones U.S. Select REIT Index intends to measure the performance of publicly traded REITs and REIT-like securities. The index is a subset of the Dow Jones U.S. Select Real Estate Securities Index (RESI), which represents equity real estate investment trusts (REITs) and real estate operating companies (REOCs) traded in the U.S. The indices are designed to serve as proxies for direct real estate investment, in part by excluding companies whose performance may be driven by factors other than the value of real estate. FTSE World Government Bond Index 1-5 Years (hedged to USD) comprises central government debt from 22 Countries (Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, Netherlands, New Zealand, Norway, Poland, Portugal, Spain, Sweden, Switzerland, UK, and US), denominated in the domicile currency or Euros for Eurozone countries. This particular index has maturity sub-index of 1 to 5 years hedged to US dollar – currencies hedged back to the U.S. dollar (not denominated in domicile currency)
Disclosures Bloomberg Commodity Index is composed of futures contracts on physical commodities and represents twenty two separate commodities traded on U.S. exchanges, with the exception of aluminum, nickel, and zinc U.S. Treasury Index is a component of the U.S. Government index. BofA Merrill Lynch Three-Month US Treasury Bill Index is an unmanaged market index of U.S. Treasury securities maturing in 90 days that assumes reinvestment of all income. BofA Merrill Lynch 1-3 US Year Treasury Index is an unmanaged index that tracks the performance of the direct sovereign debt of the U.S. Government having a maturity of at least one year and less than three years. It is not possible to invest directly in an unmanaged index Citigroup WGBI 1−5 Years Index measures the performance of the short-term global government bond market. Barclays U.S. Government Index is comprised of the U.S. Treasury and U.S. Agency Indices. The U.S. Government Index includes Treasuries (public obligations of the U.S. Treasury that have remaining maturities of more than one year) and U.S. agency debentures (publicly issued debt of U.S. Government agencies, quasi-federal corporations, and corporate or foreign debt guaranteed by the U.S. Government). The U.S. Government Index is a component of the U.S. Government/Credit Index and the U.S. Aggregate Index. Barclays US Corporate High Yield Bond Index measures the USD-denominated, high yield, fixed-rate corporate bond market. Securities are classified as high yield if the middle rating of Moody’s, Fitch and S&P is Ba1/BB+/BB+ or below. Bonds from issuers with an emerging markets country of risk, based on Barclays EM country definition, are excluded. The US Corporate High Yield Index is a component of the US Universal and Global High Yield Indices. The index was created in 1986, with history backfilled to July 1, 1983. Barclays U.S. Municipal Index covers the USD-denominated long-term tax exempt bond market. The index has four main sectors: state and local general obligation bonds, revenue bonds, insured bonds, and prerefunded bonds. Many of the sub indices of the Municipal Index have historical data to January 1980. In addition, several sub indices based on maturity and revenue source have been created, some with inception dates after January 1980 but no later than July 1, 1993. In January 1996, Barclays Capital also began publishing a noninvestment grade municipal bond index and "enhanced" state-specific indices for Arizona, Connecticut, Maryland, Massachusetts, Minnesota, and Ohio. These indices are published separately from the Barclays Capital Municipal Bond Index. In 2005, Barclays Capital began publishing Managed Money Municipal Indices and Insurance Mandate Municipal Indices. Barclays US Treasury Index measures US dollar-denominated, fixed-rate, nominal debt issued by the US Treasury. Treasury bills are excluded by the maturity constraint, but are part of a separate Short Treasury Index. STRIPS are excluded from the index because their inclusion would result in double-counting. The US Treasury Index is a component of the US Aggregate, US Universal, Global Aggregate and Global Treasury Indices. The US Treasury Index was launched on January 1, 1973.
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