For readers of our third quarter commentary, we noted how the summer's declining stock market was driven by global worries about China’s economy. But in an unexpected about-face, stock markets suddenly rebounded as those fears receded in October. Financial markets respond to events as they unfold, making predictions difficult even for those who are armed with the best economic forecasts available. In short, market movements are largely random.
The accompanying chart, which encompasses the past 15 years of stock and bond markets, illustrates the unpredictability of investment returns. The chart breaks down various asset classes from US, International and Emerging Market stocks, to Real Estate and various types of bonds.
It immediately becomes apparent how difficult it is to find a pattern in the matrix. For example:
In 2014, US Real Estate was by far the best performing asset class. But in 2013, Real Estate was near the bottom of the stack. Additionally, in 2012, International Small Cap Value was at the top of the chart, but ranked near the bottom in 2011.
During the depths of the 2008 Financial Crisis, government bonds delivered positive returns, mitigating some stock market losses during the period. Again in 2011, when the European Sovereign Debt Crisis drove global stocks lower, bonds were among the top performers despite the fact that interest rates were expected to rise.
Now with a much-anticipated rate increase by the Federal Reserve and worries that this might hurt bonds, there is still no certainty this will lead to declining bond prices.
It's anyone's guess which investments will be the winners or losers in the coming year. Instead of placing bets based on market forecasts, we invest our clients' (and our own) money in well-rounded portfolios that remain diversified across a broad array of asset classes.