The Cost of Timing Markets is High
In the month of November, international developed stock markets gained 1.25%. The U.S. and Canadian equity markets recorded returns of 3.69% and 2.46%, respectively. Pacific ex Japan and Japan lagged the broader markets. The continuation of monetary easing from central banks and trade talks moving in a positive direction may provide the markets with some tailwinds moving forward. With so much uncertainty surrounding global trade and talk of recession throughout the year, some investors chose to hold excessive amounts of cash. However, they realized a large opportunity cost as the US market and broader international developed markets are up 27.21% and 18.71% year to date, respectively.
Russian Equities Having Strong Year
Broader emerging markets rose 0.28% for the month. China posted a gain of 1.78%. Brazil and Mexico lagged other markets in November, returning -4.40% and -2.07%, respectively. Emerging markets have recorded a gain of 12.30% year to date, but still trade at attractive valuations relative to the U.S. market. With CAPE ratios being inversely correlated with long-term future returns and the U.S. CAPE ratio currently at an elevated 29, investors should look to foreign markets.
Utilities and Infrastructure Lag in November
Healthcare and information technology recorded gains of 4.28% and 4.90%, respectively. Utilities and infrastructure lagged other sectors, posting returns of -1.92% and -0.77%, respectively. Much of this bull market’s return has been driven by technology companies, and investors should take care to not extrapolate these returns.
Value underperforms Growth
In November, value underperformed growth in the large-cap and small-cap space. The YTD return differential is most pronounced in the large-cap space. Momentum recorded a gain of 4.36%. Over the past year, value has also underperformed growth in the U.S. market.
Growth Outperforms in International Markets
In the international developed markets, value underperformed growth in the large-cap and small-cap space. Momentum recorded a modest gain of 1.28% while small-cap emerging market stocks returned -0.68%. The divergence of performance between growth stocks and value stocks has become relatively large. Looking forward, this should bode well for value stocks.
Savers are Being Penalized
In November, the three month Treasury bill index returned 0.12% for the month. The index’s YTD return is 2.13%, keeping pace with inflation. Further declines in rates may create negative real yields and force savers to invest in riskier assets just to maintain purchasing power. The CPI increased by 1.77% year over year through October.
Interest Rate Risk and Credit Risk Paying off in 2019
The returns of deflationary hedges were mostly flat or negative for the month. Leveraged loans and high-yield municipal bonds returned 0.59% and 0.39%, respectively. The Bloomberg Barclays U.S. Agg Bond Index returned -0.05%. Emerging market bonds are having a strong 2019, returning 12.31% year to date. Emerging market debt may warrant a higher portfolio allocation if developed market growth continues to slow and their high debt levels become burdensome.
Real Estate Outperforming in 2019
Inflation-sensitive investment returns were mostly negative for the month. Crude oil and TIPs recorded gains of 1.82% and 0.15%, respectively. Year to date, U.S. and international real estate have posted returns of 24.27% and 21.89%, respectively. MLPs and energy-related investments have lagged. Interest in gold has increased as recessionary concerns linger. Given its role as a hedge against late cycle risks and with real interest rates being low or negative, gold may receive more attention from the marginal investor.
U.S. Dollar Mixed Versus Other Currencies
Over the past three months, the U.S. dollar appreciated against the Japanese Yen and Swiss France. However, the U.S. dollar depreciated against the British pound and Chinese Yuan by 5.73% and 1.67%, respectively, over the past three months. For international equity investors, a weakening U.S. dollar will provide a tailwind to returns.
Brandon Yee, CFA, CAIA – Research Analyst
Brandon conducts investment due diligence for Versant Capital Management, and designs and implements tools and processes to support the firm’s research. His background in biology and finance help him to look at challenges from multiple angles, resulting in unique and well-rounded approaches and solutions.
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