It's easy to forget the panic that gripped many investors in 2022. Between interest rate increases and poor earnings reports roiling both the bond and stock markets, many investors were fearful of the market, understandably so. With the market upturn that began in November of 2023, markets have felt particularly smooth through the first half of 2024. At the halfway mark, portfolios are on pace to exceed their annual expected return for the year which is, of course, great news for investors.
US Large Cap stocks led the pack for the 1st half of the year (up 14.24%) with Emerging Market stocks producing strong returns as well, up 7.49%. International Developed stocks are roughly in line with expectations, up 5.34% this year. On an annualized basis this would be on track for 10.68% for the year, slightly above expectations.
Small Cap stocks (up 1.73%), bonds (down 0.71%) and Global Real Estate (down 2.08%) are a bit below expectations this year.[1] Overall, this is exactly how diversification should work, with some asset classes leading and others trailing, offering the opportunity to buy low and sell high through portfolio rebalancing. If everything moved the same way at the same time, diversification and rebalancing would not have the value that they do long-term.
In light of the better-than-expected YTD performance, perhaps the biggest surprise is these strong returns occurred while interest rates have increased. The 10-year US Treasury yield ended last year at 3.88% and as of 6/30/2024 has risen to 4.36%. As we discussed at the end of 2023, when it comes to expected returns, we believe higher government bond yields are the rising tide that lifts all boats. There is a strong, positive historical relationship between the long-term lower-risk rate (e.g. 10-year US Treasuries) and equity (stock) returns. Thus, in addition to portfolio values increasing, long-term portfolio expected returns have increased during the first half of the year as well. The combination of higher portfolio values and higher future expected returns means the long-term wealth and sustainable spending projections for clients look strong and have seen significant increases over the last 5 years.
We have to go back to 2018 to find a year when expectations of future wealth and spending ability declined. Even in a down year like 2022, for many investors, the increase in interest rates raised expected returns enough to offset the drop in portfolio values. All in all, though the last few years have felt rocky with the drop in portfolio values in March of 2020 and the decline in 2022, when we view the world in terms of long-term spending and wealth, the last 5 years have added a significant amount of long-term security and financial flexibility for disciplined investors.
[1] Indices used are Russell 1000, Russell 2000, MSCI EAFE Net, MSCI Emerging Markets Net, S&P Global REIT, Bloomberg US Aggregate
[2] Graph uses (https://home.treasury.gov/policy-issues/financing-the-government/interest-rate-statistics) for Treasury Yields, and DGSIX (https://www.morningstar.com/funds/xnas/dgsix/performance) for performance data for average investor. It assumes a 10+ year horizon for effects on wealth and spending increase/decrease assumptions
Neither asset allocation nor diversification guarantee against loss. They are methods used to manage risk.
This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding any funds or stocks in particular, nor should it be construed as a recommendation to purchase or sell a security. Past performance is no guarantee of future results. Investments will fluctuate and when redeemed may be worth more or less than when originally invested.