BONDS HAVE OUTPERFORMED STOCKS OVER THE PAST 2 AND A HALF YEARS

Have bonds beat stocks or have stocks beat bonds, broadly, since January 1st, 2018?

In 2017 our investors, in our fee based investment accounts that utilize our risk management process, experienced solid returns in line with the major stock indices.

In 2018 we shifted to a conservative stance based upon valuations and the lack of earnings growth in the U.S. economy.  So how have bonds (conservative investments) performed versus a portfolio which was globally diversified in stocks or one that was comprised of U.S. stocks, broadly?

Let’s look at some performance charts (source of all charts is stockcharts.com).

Dow Jones Global Index (which is a proxy for a globally diversified stock portfolio) versus the ICE U.S. Short Term Bond Index shows that a simple portfolio of short term treasuries has performed just as well as the global stock index with a lot less volatility.  Stocks globally have had drawdowns of roughly -15% and -26%.  (stock index in black, bond index in purple)

That same index, versus the ICE U.S. Treasury 3-7 Year Bond Index, has the same volatility of course but trails on a total return basis; where the stock proxy gained a little over +4% and the bond proxy gained a little over +10%.

The Valueline Geometric Index is an index of more than 1,600 publicly traded U.S. stocks, equally weighted; which is representative of a broadly diversified U.S. stock portfolio.  Here we see that, compared to the ICE U.S. Short Term Bond Index, bonds have outperformed stocks.  Short term bonds are up a little over +4% and stocks are down a little over -14%.

Comparing that same index to the ICE U.S. Treasury 3-7 Year Bond Index we find the same results.  Where bonds outperformed a little better than +10%, where the Valueline Geometric Index has fallen a little more than -14%.

The recent gains in the stock market are largely due to Fed stimulus, in my opinion, and not driven by fundamentals.  The following chart from FactSet illustrates the point.  The S&P 500 has gained recently while the underlying earnings have fallen dramatically.  In my experience stock prices follow earnings over the intermediate to long term, but can deviate over the short term.  I would expect more volatility in 2020.

Currently valuations are very high, which can be seen in the following chart from FactSet.  On a 12-month Forward P/E Ratio basis the S&P 500 is at it’s highest level over the past 10 years and higher than earlier this year, before the large drawdown.

Caution is still warranted.

LPL 1-05019997

DEFINITIONS

Dow Jones Global Index – a 150 stock index of leading companies from around the world in all industries.  It covers both developed and emerging markets.  The components are equally weighted, which means that price movements of the larger stocks have no greater impact on index performance than the price movements of the smaller stocks.

Factset – FactSet provides financial information and analytical applications to global buy and sell-side professionals, including portfolio managers, market research and performance analysts, risk managers, sell-side equity researchers, investment bankers, and fixed income professionals. FactSet's software platform, also called FactSet, includes real-time news and quotes, company and portfolio analysis, multi-company comparisons, industry analysis, company screening, portfolio optimization and simulation, predictive risk measurements, alpha testing and tools to value and analyze fixed income securities and portfolios.

ICE U.S. Treasury 3-7 Year Bond Index (IDCOT3 - The ICE U.S. Treasury 3-7Year Bond Index is part of a series of indices intended to assess the U.S. Treasury market. The Index is market value weighted and is designed to include U.S. dollar denominated, fixed rate securities with minimum term to maturity greater than or equal to three years and less than seven years. The ICE U.S. Treasury Bond Index Series™ has an inception date of December 31, 2015. Index history is available back to December 31, 2004.

ICE U.S. Treasury Short Term Bond Index (ICDOTS) - The ICE U.S. Treasury ShortBond Index is part of a series of indices intended to assess the U.S. Treasury market. The Index is market value weighted and is designed to include U.S. dollar denominated, fixed rate securities with minimum term to maturity greater than or equal to one month and less than one year. The ICE U.S. Treasury Bond Index Series™ has an inception date of December 31, 2015. Index history is available back to December 31, 2005.

S&P 500 Index: The modern design of the S&P 500 stock index was first launched in 1957. Performance back to 1950 incorporates the performance of predecessor index, the S&P 90. 

The index is a capitalization weighted index of the 500 large companies listed on various stock exchanges (such as the NYSE or NASDAQ).  The S&P 500 was developed and continues to be maintained by S&P Dow Jones Indices, a joint venture majority-owned by S&P Global.  The S&P 500 differs from the Dow Jones Industrial Average and the NASDAQ Composite index, because of its diverse constituency and weighting methodology. It is one of the most commonly followed equity indices, and many consider it one of the best representations of the U.S. stock market.

Value Line Geometric Index:  The Value Line Composite Index is a stock index containing approximately 1,675 companies from the NYSE, American Stock Exchange, Nasdaq, Toronto and over-the-counter markets. The Value Line Composite Index has two forms: The Value Line Geometric Composite Index (the original equally weighted index) and the Value Line Arithmetic Composite Index (an index which mirrors changes if a portfolio held equal amounts of stock.)

IMPORTANT DISCLOSURES

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security.  This memorandum is being made available for educational purposes only and should not be used for any other purpose.

The information contained herein does not constitute and should not be construed as representation or solicitation for the purchase or sale of any security or related financial instruments in any jurisdiction.  To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.

Investing involves risks including possible loss of principal.  Past performance does not guarantee future results.  Any investment or investment strategy outlined herein are not suitable for all investors, readers should conduct their own review and exercise judgment prior to investing.  Wherever there is the potential for profit there is also the possibility of loss.  No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.

International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors

This report expresses the opinions and views of the author as of the date indicated and are based on the author's interpretation of the concepts therein, and may be subject to change without notice.  Neither Highcroft, Inc., Gerald Asplund, nor LPL Financial, has no duty or obligation to update the information contained herein. 

To the extent you are receiving investment advice from a separately registered independent investment advisor or broker, please note that Highcroft, Inc., Gerald Asplund, and LPL Financial are not an affiliate of and makes no representation with respect to such entity.

Certain information contained herein concerning economic trends, Fundamentals, and/or Technical analysis, and performance is based on or derived from information provided by independent third-party sources.  The economic forecasts set forth in this material may not develop as predicted.

Technical analysis is generally based on the study of price movement, volume, sentiment, and trading flows in an attempt to identify and project price trends. Technical analysis does not consider the fundamentals of the underlying corporate issuer.

The sources from which information has been obtained is assumed to be reliable; the accuracy of such information is not guaranteed and the accuracy and completeness of such information has not been independently verified.

All indexes are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. All performance referenced is historical and is no guarantee of future results.  Investing in the index would require investors purchase an investment product, which would involve fees and expenses.

ABOUT US

Highcroft Investment Advisors provides retirement planning, investment management, financial planning, fiduciary investment management, and lifetime income planning. Certified Financial Planner. Working with business owners, individuals, and wealthy families near Wayzata, Minnetonka, Plymouth, Orono, Minnetrista, and Minneapolis Minnesota (55402, 55391, 55447, 55364, 55428). 

Highcroft Investment Advisors serves as a 3(21) and 3(38) Investment Advisor and fiduciary for labor union supplemental 401(k) and pension plans and corporate 401(k) plans.  Highcroft works with the union's counsel, recordkeeper, administrator, and the plan's trustees.  United Association, Plumbers, Pipefitters, Steamfitters, IBEW, and Carpenters.  Serving Wisconsin and Minnesota.  401(k) investment management provided through LPL Financial's corporate RIA - offering 3(21) and 3(38) services.

Working with business owners, individuals, and wealthy families near Wayzata, Minnetonka, Plymouth, Orono, Minnetrista, and Minneapolis Minnesota (55402, 55391, 55447, 55364, 55428).  As independent financial advisors we are not driven by certain products or services, instead we focus on your needs as an individual.  Services include fiduciary fee only, retirement and divorce financial planning, life insurance, capital preservation, lifetime income planning, bonds, stocks, ETF, income, IRA, brokerage, rollover IRAs.  Financial advisor near me, financial planner near me, independent planner near me.