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Market Commentary

March 17th Market Update

We know there is uncertainty, as this is uncharted water for the world. While pandemics are not new, this particular virus strain is new, and as such, we are simultaneously trying to learn and understand while developing a response and treatment.

The uncertainty is being felt around the globe, and it is unsettling on a human level.

Unknowns are unsettling. Lack of understanding can lead to fear, fear can lead to panic and panic can lead to poor decision making and reactionary behaviors. The markets are no more immune to this virus than humanity.

With this in mind, our firm would like to share an internal philosophy that we adopted years ago.  We see our firm as an “ark” providing shelter to our clients to weather the storms. But, what is an ark? If you remember the story of Noah, the ark was a haven that allowed for shelter from the storm. It was a vessel that did not have a rudder or a propeller or even an oar. It was simply a refuge. A place to wait and be safe, while minding the ship.

This is how we view our firm. While we cannot control the pandemic, we will be a refuge while weathering “the storm”. We will mind the ship and provide counsel and services with your best future in mind. We will be a sounding board and a strong shoulder to help bear the load. We will do our best to keep your money working for you.

The thing about storms is that they eventually end. This will end. Just as the ark had to “wait and weather the storm”, so do we. However, when the storms and floods passed, those who emerged from the ark found themselves surrounded by newness and a hopeful promise for a bright future. We will continue to strive to place our clients in the greatest position of strength for a hopeful tomorrow.

In addition, we have attached our current office meeting contingency plan.  Until further notice, we will not be conducting in-person meetings to protect the health and well-being of our employees and clients.

As the day on Monday, March 16th came to a close – we were reminded that storms do pass with a beautiful rainbow over our great city of Boise.

Please call with any questions or concerns.  Stay healthy and strong. This too shall pass.

RW Meeting Contingency Plan - March 2020

March 12th Market Update

This past Monday – March 9 – was the eleventh anniversary of the crescendo of global panic that marked the bottom of the bear market of 2007-09.

It is a thing of the most wonderful irony that the world has elected to celebrate this iconic anniversary with – you guessed it – another epic global panic attack.

The morning of March 9th the opening level of the S&P 500 was 2,764, down over 18% from its all-time high, recorded on February 19. Declines of that magnitude are fairly common occurrences – indeed the average annual drawdown from a peak to a trough since 1980 is close to 14%. But such a decline in barely a month is noteworthy, not for its depth but for its suddenness.

As we all know by now, the precipitants of this decline have been (a) the outbreak of a new strain of virus, the extent of which can’t be predicted, (b) the economic impact of that outbreak, which is equally unknown, and (c) most recently, the onset of a price war in oil. (That last one is surely a problem for everyone involved in the production of oil, but it’s a boon to those of us who consume it.)

The common thread here is unknowability: we simply don’t know where, when or how these phenomena will play out. And in our experience, the thing in this world that markets hate and fear the most is uncertainty. We have no control over the uncertainty; we can and should have perfect control over how we respond to it.

Or, ideally, how we don’t respond. Because the last thing in the world that long-term, goal-focused investors like us do when the whole world is selling is – you guessed it again – sell.  Instead, we encourage you to focus on the sale prices of The Great Companies of America and the World.  They’re enjoying markdowns which we historically don’t see more often than about one year in five, on average

On March 3, the erudite billionaire investor Howard Marks wrote, “It would be a lot to accept that the US business world – and the cash flows it will produce in the future – are worth 13% less today than they were on February 19.” How much more true this observation must be a little over a week later, when they’re down over 20%.

This too shall pass.

February 27th Market Update

Over the last week concerns over the spread of the coronavirus and its potential economic impact have caused global stocks to drop and interest rates to fall.  As of February 27th, the S&P 500 Index has declined approximately 12% from its recent all-time high, causing the financial media to ring the “correction territory” bell.

We do not claim to have any idea how far this outbreak will spread, nor how many lives it will claim, before it is brought under control. We’re reasonably certain that many (or perhaps most) of the world’s leading virologists and epidemiologists are working on it and believe that their efforts will ultimately succeed.  This of course is our opinion.

But if the history of similar outbreaks in this century is any guide, this would seem to be a reasonable hypothesis.

We draw your attention to:

  • SARS in 2003-04, also originating in China
  • The bird flu epidemic in 2005-2006
  • In 2009, a new strain of swine flu
  • The Ebola outbreak in the autumn of 2014
  • The mosquito-borne Zika virus outbreak in 2016-17

On that first day of the litany of epidemics cited above, the S&P 500 closed at 855.70. Seventeen years and six epidemics later (including the current one) the Index is fairly close to three and a half times higher.

Because markets hate uncertainty there has been and will likely continue to be higher volatility in the short-term.  However, it is doubtful that the long-term viability of companies like Exxon and Chevron, or Microsoft and Amazon, or Nestle and Coca-Cola are in danger. Despite the inherent volatility, we believe ownership in companies like those cited provide the best opportunity to protect your purchasing power and grow your families wealth over time.

Our advice is to remain focused on that which remains in our control: asset allocation, diversification, and rebalancing. For our retirees, we have built your fixed income portfolios to provide a minimum of 5 – 7 years of spending without the need to sell stocks. This allows us time to withstand stock market volatility. For accumulators, we will continue to dollar cost average into your diversified portfolios, perhaps accelerating buys as the market drops further.

We believe the coronavirus scare is another example of the market overreacting and therefore a buying opportunity for investors.  Warren Buffett famously said, “Be fearful when others are greedy and greedy when others are fearful.”  You may see activity in your accounts in the days and weeks ahead as we look to take advantage of this opportunity.

FT Cornoavirus Economic Impact

Why Should You Diversify?

As we begin 2019, 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, the S&P 500 Index had an annualized return of 11.34% while the MSCI World ex USA Index returned 1.86%, and the MSCI Emerging Markets Index returned 0.78%. As US stocks have outperformed international and emerging markets stocks over the last several years, some investors might be reconsidering the benefits of investing outside the US.

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
  • Recent performance is not a reliable indicator of future returns.

There’s a world of opportunity in equities

The global equity market is large and represents a world of investment opportunities. As shown in Exhibit 1, nearly half of the investment opportunities in global equity markets lie outside the US. Non-US stocks, including developed and emerging markets, account for 48% of world market capitalization¹ and represent thousands of companies in countries all over the world. A portfolio investing solely within the US would not be exposed to the performance of those markets.

world equity chart

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.

The lost decade

We can examine the potential opportunity cost associated with failing to diversify globally by reflecting on the period in global markets from 2000– 2009. During this period, often called the “lost decade” by US investors, the S&P 500 Index recorded its worst ever 10-year performance with a total cumulative return of –9.1%. However, looking beyond US large cap equities, conditions were more favorable for global equity investors as most equity asset classes 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 of the 11 decades starting in 1900 and ending in 2010, the US market outperformed the world market in five decades and underperformed in the other six.² This further reinforces why an investor

pursuing the equity premium should consider a global allocation. By holding a globally diversified portfolio, investors are positioned to capture returns wherever they occur.

global index returns table

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.

Pick a country?

Are there systematic ways to identify which countries will outperform others in advance? Exhibit 3 illustrates the randomness in country equity market rankings (from highest to lowest) for 22 different developed market countries over the past 20 years. This graphic conveys how difficult it would be to execute a strategy that relies on picking the best country and the resulting importance of diversification.

In addition, concentrating a portfolio in any one country can expose investors to large variations in returns. The difference between the best- and worst-performing countries can be significant. For example, since 1998, the average return of

the best-performing developed market country was approximately 44%, while the average return of the worst-performing country 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 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.

equity returns of developed markets chart for RW investment

  1. The total market value of a company’s outstanding shares, computed as price times shares
  2. Source: Annual country index return data from the Dimson-Marsh-Staunton (DMS) Global Returns Data, provided by Morningstar,
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. Diversifica- tion 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
2018 4th Quarter Market Commentary