“It’s like déjà vu all over again.” This famous phrase was uttered by major league baseball hall of famer and beloved American philosopher Yogi Berra in the early 1960s. He was describing what it was like to watch Mickey Mantle and Roger Maris bat back-to-back for the New York Yankees, including the famous 1961 season when Maris set the then Major League Baseball record with 61 home runs in a season, with Mantle close behind at 54. Berra felt like every day at the ballpark was like watching a replay of the day before. As we wrap up the third quarter and turn the calendar to October, we will once again experience playoff baseball in New York but this time with Giancarlo Stanton and Aaron Judge filling the roles of powerful sluggers in the middle of the Yankee lineup. And while it may feel like déjà vu all over again for Yankee fans, it also does for market participants as global economic and market performance in the third quarter had a familiar feeling to it. One investors have enjoyed throughout much of the last couple of years. (No déjà vu this season for this Milwaukee Brewers fan as the team actually made the playoffs instead of stumbling through September to an 81-81 record).
On the economic front in the third quarter we saw enduring strength across many areas once again. We had another strong Institute of Supply Management (ISM) reading, showing ongoing strength in both manufacturing and the services sector of the economy. We saw retail sales continue to grow, likely as a result of the recent tax cuts. Additionally, housing prices continue to rise even as mortgage rates go up thanks to the continually declining unemployment rate and ongoing job growth. With each monthly jobs report showing strong jobs growth and declining unemployment, investors are likely thinking they’ve seen it all before.
In addition, consumer and business confidence continues to grow as well. Unfortunately, that feeling of déjà vu extended overseas, but in Europe the feeling is one of concern as tepid economic activity rather than strong growth (like the United States) has investors spooked. The trend of U.S. economic growth outpacing that of its peers across Europe is one we’ve been seeing for many quarters, and has been reflected in stock market returns over the last 12 months.
For the twelve-month period ending Sept. 30, 2018, U.S. stocks (as represented by the S&P 500) have returned 17.9% while international developed equities (as represented by the MSCI EAFE Index) have produced a return of only 2.74% – creating a massive return differential of more than 1,500 basis points. Market forecasters continue to harp on the fact that foreign equities are cheaper than domestic equities but as the gains show, in the near term at least, valuations are not a reliable indicator of future market returns. That feeling of seeing this market in the past is exemplified by returns across most major stock and bond markets.
As we’ve seen throughout much of the market’s activities in recent quarters growth stocks once again outpaced value with the Russell 3000 Growth Index returning 8.9% for the third quarter while its value cousin, the Russell 3000 Value Index, produced just a 5.4% gain over the same period. This trend extends to a 25.9% gain for growth over the trailing year with a gain of just 9.5% for value. Looking at the bigger picture, stocks continued to outpace bonds over the quarter with U.S. bonds (as represented by the Barcap U.S. Aggregate Index) flat for the third quarter, while the S&P 500 rose 7.7%.
While market activity may be reminiscent of the recent past for investors, it makes sense for investors to spend a little time looking ahead even as the good times continue. The Irish are stereotypically considered a glass-is-half-full culture while the neighboring English are often viewed as the glass-is-half-empty. Their contrasting philosophies make for a good analogy for how to invest in today’s climate. The Irish would say, “Make hay while the sun shines.” While the English would say, “Repair the roof while the sun shines.” In other words, optimistic investors should ride the momentum of the market as long as possible and make as much money as possible, while more sober investors should pause, take stock of their gains and turn defensive before the storm comes. Since its near impossible to know exactly when that storm is going to hit if an investor wants to avoid that déjà vu feeling of 2000 or 2008, it makes sense to prepare for the storm even while enjoying the sunshine at the time. That means that the prudent course is to stay invested but to remain balanced and diversified and hold a portfolio that suits your risk tolerance and investment timeframe; don’t get swept up into the euphoria of the moment or caught up in thinking that the good run of market performance has to end tomorrow. Review your asset allocation weights and make sure they are within your target ranges since the divergence of returns has been so high over the last year it may have pushed your allocation out of position, and; therefore, if necessary rebalance back towards your personal target. That strategy ought to keep you in the present and planning for the future rather than thinking about the past. As Yogi Berra once said, “it’s tough to make predictions, especially about the future.”