Tuesday, September 17, 2019

From the Desk of David Burks – “Strange Days Indeed”

David Burks
Author position
Sr. Vice President | Equity Income Analyst

From the Desk of David Burks

Senior Vice President and Equity Income Analyst David Burks has been with Hilliard Lyons, A Baird Company, since 1983. David has been nationally recognized for his stock recommendations eleven times: seven times by Thomson Reuters and four by The Wall Street Journal. David has appeared regularly on CNBC over the years.

Stocks, Bonds & Gold All Moving the Same Direction?

Two Unique Years Back-to-Back

The inspiration for this month’s article comes from that famous investor, John Lennon. Well, alright, legendary musician, John Lennon. We are specifically referring to Lennon’s 1980 song, “Nobody Told Me.” This particular song includes the following lyric in the chorus: “Nobody told me there’d be days like these. Strange days indeed.” We think Lennon’s words also apply to what we have observed in the financial markets the past two years. How is that so?

Let’s begin by looking at the chart above, which includes the performance of the S&P 500, 20+ year Treasury bonds, and gold from the beginning of 2019 through the end of August. All three asset classes have performed quite well this year, generating total returns of at least 18%. This is impressive – and rare. In fact, according to financial blogger Ben Carlson, there has only been one other time since 1930 that all three asset classes have risen by at least 15% in a year. That last occurred in 1986. The main parallel between that year and 2019 is that both years experienced declining interest rates. So we’re just a few months away from potentially witnessing something for only the second time in nearly 90 years.

2018 – An Even More Unusual Year

Last year was even more noteworthy from an historical perspective than this year. By contrast to 2019 (so far), during 2018 all three asset classes – stocks, bonds and gold – declined in value. This was even more unusual than what’s taking place this year. Indeed, this was the first time this has happened since 1930. So we’ve had one year (2018) where something happened that had not happened previously, followed by a year (2019) where something may happen for only the second time ever. We note, however, that gold didn’t begin actively trading until President Nixon took the dollar off the gold standard in 1971.

These three asset classes moving in sync together in consecutive years has certainly been extremely rare by any historical measure. In 2018 this was an aberration on the negative side; this year (thus far) it’s been an aberration on the positive side.

Are There Potential Takeaways From These Rare Occurrences?

What can we learn, if anything, from these past two years’ worth of unusual trends? First, they are a strong reminder that we never know how any particular asset class is going to perform. Uncertainty always exists with regard to direction, magnitude and movement of any asset class. For example, bonds were expected to be pressured this year by an anticipated rise in interest rates. The consensus among Wall Street economists at the beginning of this year was at least a 3% or higher yield on the 10-year Treasury bond by September. However, as of this writing, the yield on the 10-year stands at 1.84%. Thus, instead of declining in value, bonds have actually moved significantly higher in 2019. In other words, the consensus was wrong.

In addition, because the three asset classes of stocks, bonds and gold moving in tandem is such a rare event, it reinforces the importance of diversification. We believe the trends of the past two years represent an anomaly and will likely remain rare going forward. Consequently, we think most investors are wise to diversify their investments across an array of financial assets. Historically that approach both decreases risk and increases the chances of capturing the associated gains when one asset class performs particularly well.

Finally, the advances in both bond and gold prices this year represent outsized moves in a relatively short period when compared to their historical returns. Stocks, of course, have also performed very well year to date. As a result, investors may wish to consider using the strength in these asset classes as an opportunity to rebalance portfolios.

Reminder

Investors have experienced very unusual trends in stocks, bonds and gold these past two years. Just as the economic environment is constantly changing and evolving, so is the investment landscape. We encourage you to speak with your Wealth Advisor to determine if your financial assets are properly diversified or to help you better prepare for the inevitable changes that tomorrow might bring.


IMPORTANT DISCLOSURES

Each client’s investment needs, risk tolerance, and goals are different. This newsletter is not meant to be advice for any specific investor. Nothing in it should be construed as an offer to sell, or a solicitation of an offer to buy, any securities. This should not be used as the sole basis for an investment decision. Any opinions or estimates are subject to change without notice. For information about how any of this information applies to your personal financial situation, please contact your Wealth Advisor.

Past performance is not a guarantee of future results.

Although the information provided to you in this newsletter was obtained or compiled from sources that we believe are reliable, J.J.B. Hilliard, W.L. Lyons, LLC, A Baird Company, cannot, and does not, guarantee that the information or data is accurate, timely, valid, or complete.

All investing involves risk, including the possible loss of principal. You should carefully consider investment objectives, risks, charges, and expenses of any investment before investing. Diversification and asset allocation do not guarantee a profit or guarantee against a loss. Note: It is not possible to invest directly in an index.

Stock markets, especially foreign markets, are volatile and can decline significantly in response to adverse issuer, political, regulatory, market or economic developments. The bond market is also volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect can be more pronounced for longer-term securities.) Fixed income securities also carry inflation risk, liquidity risk, call risk, and credit and default risks.