When Nothing’s Working

When Nothing’s Working

The Wall Street Journal highlighted in a recent article that on the whole, 2018 has been a rough year for investors. In the article carrying the dramatic title, “No Refuge for Investors as 2018 Rout Sends Stocks, Bonds, Oil Lower,” the Journal noted that:

Data show global stocks and bonds could both finish the year in the red for the first time in at least a quarter-century, according to BlackRock Inc.

Major stock benchmarks in the U.S., Europe, China and South Korea have all slid 10% or more from recent highs. Crude oil’s tumble has dragged it well into bear-market territory, emerging-market currencies have broadly fallen against the dollar…

Havens such as U.S. Treasury bonds and gold rallied this fall as U.S. stocks and industrial commodities staged their fourth-quarter swoon. But both are still down on a price basis for the year, reflecting solid economic growth and tighter Federal Reserve policy that have begun to push interest rates out of their post-financial crisis doldrums.

All told, 90% of the 70 asset classes tracked by Deutsche Bank are posting negative total returns in dollar terms for the year through mid-November. The previous high was in 1920, when 84% of 37 asset classes were negative. Last year, just 1% of asset classes delivered negative returns.

The article included the chart displayed below from Deutsche Bank that demonstrates how few things (i.e., assets) are “working” this year. The difference between investors’ experience through the first nearly 11 months of 2018 vs. all of 2017 is striking.


In the chart below, I present a more granular view of the year-to-date performance of the major asset classes that generally comprise the bulk of globally diversified investor’s portfolio. Specifically, the chart presents the performance of U.S. stocks (S&P 500 Index), stocks from developed markets (MSCI EAFE Index), investment-grade U.S. bonds (Barclays U.S. Aggregate Index) and a proxy for risk-free cash (Barclays U.S. Treasury Bills 1-3 Month Index). All data are from Ycharts.

Three observations immediately come to mind:

  1. All three major risk asset classes (U.S. stocks, foreign stocks and U.S. bonds) have underperformed cash.
  2. All three are nearly in negative territory—U.S. stocks are still marginally positive for the year while the other two are in the red.
  3. For a typical globally diversified investor, 2018 thus far is probably more aptly described as “disappointing” than a “rout” as branded by the Journal in the previously mentioned article’s headline.

In order to explore these observations further, I examined the last 45 years of index returns data (as far back as reliable data exists on these specific indexes or their close surrogate in the case of U.S. bonds and cash) to observe to what extent 2018 has been truly anomalous and to see whether we can glean any lessons as to what to expect going forward.

My analysis first focused on identifying years similar the experience so far in 2018 where both U.S. stocks and bonds underperformed risk-free cash. The table below presents the calendar years returns for U.S. stocks (S&P 500 Index), foreign stocks (MSCI EAFE Index) and U.S. bonds (Barclays U.S. Treasury Index) in years where both U.S. stocks and bonds underperformed cash (One-Month U.S. Treasury Bills) since 1973. Years highlighted with bold text and grey shading are ones where international stocks also trailed cash. All data are from Dimensional Fund Advisors.


A few primary observations:

  • Years where nothing “works” aren’t unprecedented—we’ve seen U.S. stocks and bonds both trail cash seven times during the last 45 years, roughly equivalent to once every six or so years.
  • It’s been a while since we’ve last experienced a year where both stocks and bonds trailed cash—the last occurrence was more than a quarter century ago in 1994 and the bulk of the others occurred during the late 1970s and early 1980s—a fact that likely explains at least in part why this year feels unique.
  • International equity diversification can be a powerful risk management tool—in four of the seven years where both U.S. stocks and bonds trailed cash (1977, 1978, 1987 and 1994), international stocks outperformed, often by significant margins.
  • If U.S. stocks were to join international stocks and U.S. bonds in negative territory at the end of the year, such an occurrence would be unprecedented in the data set evaluated—something that also likely further explains why this year feels unique.

I conclude by examining the performance of U.S. and foreign stocks in the one, three and five years following calendar years where both U.S. stocks and bonds underperformed cash. I do so to see if the past can teach us any lessons about what we may see in the years ahead assuming current trends hold. The table below demonstrates that U.S. and foreign stocks have generally fared quite well following years in which they both trailed cash.


Of course, it’s important to recognize the limitations of this analysis as a reliable forecasting tool given the small sample size (after all we’re dealing with just seven observations here) and the reality that past performance is only that, past performance and there’s no guarantee that it will replicate itself in the future. Nevertheless, we always believe examining past historical episodes can be instructive for providing perspective around the range of outcomes experienced in the past following similar market events.


Past performance is no guarantee of future results. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. All performance referenced is historical and is no guarantee of future results. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk. The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful. All investing involves risk including loss of principal. Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal, and potential liquidity of the investment in a falling market. Investing in foreign and emerging markets securities involves special additional risks. These risks include, but are not limited to, currency risk, geopolitical risk, and risk associated with varying accounting standards. Investing in emerging markets may accentuate these risks. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price. U.S. Treasuries may be considered “safe haven” investments but do carry some degree of risk including interest rate, credit and market risk. They are guaranteed by the U.S. government of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. Additional, although being considered risk-free, 3-Month Treasury Bills can be subject to inflation and interest rate risk. The fact price swings in commodities and currencies will result in significant volatility in an investor’s holdings. Commodities include increased risks, such as political, economic, and currency instability and may not be suitable for all investors.


Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. MSCI EAFE Index is a stock market index that is designed to measure the equity market performance of developed markets outside of the U.S. & Canada. Bloomberg Barclays US Aggregate Index is a broad-based benchmark that measures the investment-grade, U.S. dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate and hybrid ARM pass-throughs), ABS, and CMBS (agency and non-agency). Bloomberg Barclays US Treasury Index is a broad-based benchmark that measures the performance of U.S. Treasury securities. Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Private Advisor Group, a Registered Investment Advisor. Private Advisor Group and Kathmere Capital Management are separate entities from LPL Financial.

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