John Gorlow
| Oct 13, 2019
The S&P 500 delivered a modest increase in the third quarter, helping stocks hold on to their biggest year-to-date gains in more than two decades. The simultaneous rise in safe assets like Treasuries reflects the fact that the most prominent economic narratives today are not optimistic. If you add the bleak surveys of business confidence worldwide, you may decide it’s time to batten down the hatches in preparation for a downturn. But you can't predict the future, and neither can anyone else. Meanwhile, in the battle to capture customers, Charles Schwab shook the brokerage industry last week when it said it will cut commissions to zero. Schwab’s move has since been matched by TD Ameritrade, Fidelity and others. We’ll look at benefits and potential concerns of this latest step after a review of Q3 market results.
Q3 2019 Market Report
Courtesy of DFA
World Asset Classes
It was a volatile three months for the markets. Stocks surged to new highs in July ahead of the Fed’s first interest rate cut in a decade, but then stocks dropped in August. Major indexes rebounded from those losses in subsequent weeks as investors rotated out of growth stocks into cheaper out-of-favor value stocks.
Looking at broad market indices, US equities outperformed non-US developed and emerging markets during the third quarter. Value stocks outperformed growth stocks on a marketwide basis in the US but underperformed in non-US and emerging markets. Small caps outperformed large caps in non-US markets but underperformed in the US and emerging markets. REIT indices outperformed equity market indices in both the US and non-US developed markets.1
|
Ranked Returns for the Quarter
|
%
|
|
Dow Jones US Select REIT Index
|
6.83
|
|
S&P Global ex US REIT Index (net div.)
|
3.19
|
|
Bloomberg Barclays US Aggregate Bond Index
|
2.27
|
|
S&P 500 Index
|
1.70
|
|
Russell 1000 Index
|
1.42
|
|
Russell 1000 Value Index
|
1.36
|
|
Russell 3000 Index
|
1.16
|
|
One-Month US Treasury Bills
|
0.53
|
|
MSCI World ex USA Small Cap Index (net div.)
|
-0.27
|
|
Russell 2000 Value Index
|
-0.57
|
|
MSCI World ex USA Index (net div.)
|
-0.93
|
|
MSCI World ex USA Value Index (net div.)
|
-1.44
|
|
MSCI All Country World ex USA Index (net div.)
|
-1.8
|
|
Russell 2000 Index
|
-2.4
|
|
MSCI Emerging Markets Index (net div.)
|
-4.25
|
|
MSCI Emerging Markets Small Cap Index (net div.)
|
-4.58
|
|
MSCI Emerging Markets Value Index (net div.)
|
-6.48
|
|
As of 9/30/2019
|
|
US Stocks (55%)
US equities outperformed both non-US developed and emerging markets in the third quarter. Value outperformed growth on a marketwide basis in the US. However, value underperformed growth across large cap stocks but outperformed in small caps. Small caps underperformed large caps in the US. REIT indices outperformed equity market indices.
|
Ranked Returns for the Quarter
|
%
|
|
Russell 1000 Growth Index
|
1.49
|
|
Russell 1000 Index
|
1.42
|
|
Large Value
|
1.36
|
|
Russell 3000 Index
|
1.16
|
|
Russell 2000 Value Index
|
-0.57
|
|
Russell 2000 Index
|
-2.40
|
|
Russell 2000 Growth Index
|
-4.17
|
|
As of 9/30/2019
|
|
|
Period Returns (%)
|
YTD
|
1 Yr
|
3 Yrs*
|
5 Yrs*
|
10 Yrs*
|
|
Russell 1000 Growth Index
|
23.30
|
3.71
|
16.89
|
13.39
|
14.94
|
|
Russell 1000 Index
|
20.53
|
3.87
|
13.19
|
10.62
|
13.23
|
|
Russell 3000 Index
|
20.09
|
2.92
|
12.83
|
10.44
|
13.08
|
|
Russell 1000 Value Index
|
17.81
|
4.00
|
9.43
|
7.79
|
11.46
|
|
Russell 2000 Growth Index
|
15.34
|
-9.63
|
9.79
|
9.08
|
12.25
|
|
Russell 2000 Index
|
14.18
|
-8.89
|
8.23
|
8.19
|
11.19
|
|
Russell 2000 Value Index
|
12.82
|
-8.24
|
6.54
|
7.17
|
10.06
|
|
As of 9/30/2019
|
|
* Annualized
|
International Developed Stocks (34%)
In US dollar terms, developed markets outside the US outperformed emerging markets but underperformed the US market during the third quarter. Small caps outperformed large caps in non-US developed markets. Value underperformed growth across large cap stocks but outperformed in small caps.
|
Ranked Returns (%) for the Quarter
|
Local currency
|
US currency
|
|
MSCI World ex USA Small Cap Index (net div.)
|
2.33
|
-0.27
|
|
MSCI World ex USA Growth Index (net div.)
|
2.23
|
-0.45
|
|
MSCI World ex USA Index (net div.)
|
1.75
|
-0.93
|
|
MSCI World ex USA Value Index (net div.)
|
1.24
|
-1.44
|
|
As of 9/30/2019
|
|
|
|
Period Returns (%)
|
YTD
|
1 Yr
|
3 Yrs*
|
5 Yrs*
|
10 Yrs*
|
|
MSCI World ex USA Growth Index (net div.)
|
18.35
|
2.39
|
7.50
|
5.05
|
6.13
|
|
MSCI World ex USA Index (net div.)
|
13.57
|
-0.95
|
6.49
|
3.06
|
4.78
|
|
MSCI World ex USA Small Cap Index (net div.)
|
12.58
|
-5.62
|
5.54
|
5.14
|
6.93
|
|
MSCI World ex USA Value Index (net div.)
|
8.79
|
-4.31
|
5.38
|
1.01
|
3.37
|
|
As of 9/30/2019
|
|
* Annualized
|
Emerging Market Stocks (11%)
In US dollar terms, emerging markets underperformed developed markets, including the US, in the third quarter. Value stocks underperformed growth stocks. Small caps underperformed large caps.
|
Ranked Returns (%) for the Quarter
|
Local currency
|
US currency
|
|
MSCI Emerging Markets Growth Index (net div.)
|
0.16
|
-2.04
|
|
MSCI Emerging Markets Index (net div.)
|
-2.07
|
-4.25
|
|
MSCI Emerging Markets Small Cap Index (net div.)
|
-2.27
|
-4.58
|
|
MSCI Emerging Markets Value Index (net div.)
|
-4.33
|
-6.48
|
|
As of 9/30/2019
|
|
|
|
Period Returns (%)
|
YTD
|
1 Yr
|
3 Yrs*
|
5 Yrs*
|
10 Yrs*
|
|
MSCI Emerging Markets Growth Index (net div.)
|
10.04
|
1.01
|
7.04
|
4.17
|
4.75
|
|
MSCI Emerging Markets Index (net div.)
|
5.89
|
-2.02
|
5.97
|
2.33
|
3.37
|
|
MSCI Emerging Markets Value Index (net div.)
|
1.82
|
-5.03
|
4.81
|
0.38
|
1.92
|
|
MSCI Emerging Markets Small Cap Index (net div.)
|
1.81
|
-5.49
|
1.32
|
-0.13
|
3.21
|
|
As of 9/30/2019
|
|
* Annualized
|
Real Estate Investment Trusts (REITs)
In the third quarter, US real estate investment trusts outperformed non-US REITs in US dollar terms.
|
Ranked Returns for the Quarter
|
%
|
|
Dow Jones US Select REIT Index
|
6.83
|
|
S&P Global ex US REIT Index (net div.)
|
3.19
|
|
As of 9/30/2019
|
|
|
Asset Class
|
YTD
|
1 Yr
|
3 Yrs*
|
5 Yrs*
|
10 Yrs*
|
|
Dow Jones US Select REIT Index
|
24.64
|
16.41
|
6.48
|
9.7
|
12.69
|
|
S&P Global ex US REIT Index (net div.)
|
18.34
|
12.8
|
5.10
|
5.35
|
7.29
|
|
As of 9/30/2019
|
|
* Annualized
|
Commodities
The Bloomberg Commodity Index Total Return declined by 1.84% in the third quarter. Nickel and silver led quarterly performance, returning 34.75% and 9.92%, respectively. Kansas wheat and coffee were the worst performers, declining by 13.66% and 10.76%, respectively.
|
Period Returns (%)
|
QTR
|
YTD
|
1 Yr
|
3 Yrs*
|
5 Yrs*
|
10 Yrs*
|
|
Bloomberg Commodity Index Total Return
|
-1.84
|
3.13
|
-6.57
|
-1.50
|
-7.18
|
-4.32
|
|
As of 9/30/2019
|
|
* Annualized
|
Fixed Income
Interest rates in the US Treasury market decreased during the third quarter. The yield on the 5-year Treasury note declined by 21 basis points (bps), ending at 1.55%. The yield on the 10-year Treasury note decreased by 32 bps to 1.68%. The 30-year Treasury bond yield fell by 40 bps to 2.12%. On the short end of the yield curve, the 1-month Treasury bill yield decreased to 1.91%, while the 1-year Treasury bill yield decreased by 17 bps to 1.75%. The 2-year Treasury note yield finished at 1.63% after a decrease of 12 bps. In terms of total returns, short-term corporate bonds gained 1.17%. Intermediate-term corporate bonds had a total return of 1.74%. The total return for short-term municipal bonds was 0.33%, while intermediate-term muni bonds returned 1.02%. Revenue bonds outperformed general obligation bonds.2
|
Bond Yields Across Issuers
|
(%)
|
|
10-Year US Treasury
|
1.68
|
|
State and Local Municipals
|
2.83
|
|
AAA-AA Corporates
|
2.41
|
|
A-BBB Corporates
|
3.07
|
|
As of 9/30/2019
|
|
|
Period Returns (%)
|
QTR
|
YTD
|
1 Yr
|
3 Yrs*
|
5 Yrs*
|
10 Yrs*
|
|
Bloomberg Barclays US Government Bond Index Long
|
7.83
|
19.61
|
24.58
|
4.11
|
6.73
|
6.86
|
|
Bloomberg Barclays US Aggregate Bond Index
|
2.27
|
8.52
|
10.30
|
2.92
|
3.38
|
3.75
|
|
Bloomberg Barclays Municipal Bond Index
|
1.58
|
6.75
|
8.55
|
3.19
|
3.66
|
4.16
|
|
Bloomberg Barclays US TIPS Index
|
1.35
|
7.58
|
7.13
|
2.21
|
2.45
|
3.46
|
|
Bloomberg Barclays US High Yield Corporate Bond Index
|
1.33
|
11.41
|
6.36
|
6.07
|
5.37
|
7.94
|
|
FTSE World Government Bond Index 1-5 Years (hedged to USD)
|
0.96
|
3.68
|
5.26
|
2.14
|
1.98
|
1.86
|
|
ICE BofAML 1-Year US Treasury Note Index
|
0.56
|
2.33
|
3.13
|
1.60
|
1.12
|
0.79
|
|
ICE BofAML US 3-Month Treasury Bill Index
|
0.56
|
1.81
|
2.39
|
1.54
|
0.98
|
0.54
|
|
FTSE World Government Bond Index 1-5 Years
|
-0.84
|
1.41
|
2.36
|
0.25
|
-0.07
|
-0.05
|
|
As of 9/30/2019
|
|
* Annualized
|
Global Fixed Income
Interest rates in the global developed markets generally decreased during the third quarter. Longer-term bonds generally outperformed shorter-term bonds in the global developed markets. Short- and Intermediate-term nominal interest rates are negative in Japan and entirely negative across the German government bond yield curve.3
|
Changes in Yields (bps) since 6/30/2019
|
|
|
1Y
|
5Y
|
10Y
|
20Y
|
30Y
|
|
US
|
-14.40
|
-19.20
|
-32.80
|
-37.30
|
-40.80
|
|
UK
|
-18.40
|
-34.60
|
-43.70
|
-48.30
|
-50.40
|
|
Germany
|
-5.90
|
-12.30
|
-26.60
|
-36.10
|
-36.80
|
|
Japan
|
-10.00
|
-10.40
|
-5.70
|
-3.10
|
0.20
|
|
As of 9/30/2019
|
|
|
|
|
|
Impact of Diversification
These portfolios illustrate the performance of different global stock/bond mixes and highlight the benefits of diversification. Mixes with larger allocations to stocks are considered riskier but have higher expected returns over time.4, 5
|
Ranked Returns for the Quarter
|
%
|
|
100% Treasury Bills
|
0.53
|
|
25/75
|
0.44
|
|
50/50
|
0.33
|
|
75/25
|
0.22
|
|
100% Stocks
|
0.10
|
|
As of 9/30/2019
|
|
|
Period Returns (%)
|
YTD
|
1 Yr
|
3 Yrs*
|
5 Yrs*
|
10 Yrs*
|
10-Yr STDEV¹
|
|
100% Stocks
|
16.71
|
1.95
|
10.3
|
7.23
|
8.93
|
13.2
|
|
75/25
|
12.94
|
2.3
|
8.15
|
5.75
|
6.93
|
9.9
|
|
50/50
|
9.18
|
2.48
|
5.96
|
4.2
|
4.85
|
6.6
|
|
25/75
|
5.44
|
2.47
|
3.73
|
2.59
|
2.7
|
3.3
|
|
100% Treasury Bills
|
1.72
|
2.29
|
1.46
|
0.91
|
0.48
|
0.22
|
|
As of 9/30/2019
|
|
* Annualized
|
Feature Article
The Case of the Disappearing Fees
Equity trading commissions have been steadily declining for some time. This month, online brokers, including Schwab, Fidelity, TD Ameritrade and others announced the transition to commission-free trades. The net effect of this shift is that the majority of retail equity trading in the United States is now available free of charge.
Brokers have traditionally collected trade commissions from investors while also collecting compensation for directing orders to certain exchanges and dealers. By slashing trading fees to zero, brokerages will now lose the commission end of the deal. It’s not a trifling sum. For instance, Schwab’s new no-fee plan is expected to shave “roughly 3 to 4 percent of its total net revenue—perhaps $100 million each quarter,” reports the New York Times (Tara Siegel Bernard, 1-October 2019). But brokers will be searching for new ways to rebuild profitability, for example, by paying a lower interest rate on sweep money market funds and they will continue to retain revenue from selling their order-flow to third party market makers.
This is where it gets murky. Brokers must disclose that they receive order-flow payments, but they don’t have to report how much. More equity flow is likely to be sold and controlled by market-making firms. This opens the door to potentially more aggressive deal-making that doesn’t work in consumers’ best interests. Leveraging their increased pricing power, these market-making firms may be tempted to widen equity spreads, resulting in higher indirect trading costs for consumers said Dan Spier, Head of Trading at Aperio. Will clearly defined commissions simply be recouped in the opaque world of market-makers? Consumers can’t direct their orders to a particular market-maker, so have no power in this transaction to make brokerage markets more competitive. Brokerage firms are in business to make money, says Jason Zweig of the WSJ, and "when you trade for free, you still pay—just at a different tollbooth." As a no-commission world becomes the norm, the spotlight may turn on brokerage houses and how they make their money.
This isn’t to suggest that no-fee trading isn’t a big win for consumers in important respects. It theoretically leaves more money in investors’ pockets by lowering the cost of equity investing. And it creates more equalized access to stock investing for those who were previously shut out by fees. The downside is that no-fee investing could encourage more frequent portfolio turnover and impulsive buying and selling, two sure ways to torpedo long-term portfolio performance.
If you have questions, including about your asset allocation, please contact me. I am here to help.
Regards,
John Gorlow
President
Cardiff Park Advisors
888.332.2238 Toll Free
760.635.7526 Direct
760.271.6311 Cell
760.284.5550 Fax
jgorlow@cardiffpark.com
1. The S&P data is provided by Standard & Poor's Index Services Group. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. MSCI data © MSCI 2019, all rights reserved. Dow Jones data © 2019 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. S&P data © 2019 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. Bloomberg Barclays data provided by Bloomberg. Treasury bills © Stocks, Bonds, Bills, and Inflation Yearbook™, Ibbotson Associates, Chicago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield).
2. Yield curve data from Federal Reserve. State and local bonds are from the S&P National AMT-Free Municipal Bond Index. AAA-AA Corporates represent the ICE BofAML US Corporates, AA-AAA rated. A-BBB Corporates represent the ICE BofAML US Corporates, BBB-A rated. Bloomberg Barclays data provided by Bloomberg. US long-term bonds, bills, inflation, and fixed income factor data © Stocks, Bonds, Bills, and Inflation (SBBI) Yearbook™, Ibbotson Associates, Chicago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield). FTSE fixed income indices © 2019 FTSE Fixed Income LLC, all rights reserved. ICE BofAML index data © 2019 ICE Data Indices, LLC. S&P data © 2019 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.
3. One basis point equals 0.01%. Source: ICE BofAML government yield. ICE BofAML index data © 2019 ICE Data Indices, LLC.
4. Asset allocations and the hypothetical index portfolio returns are for illustrative purposes only and do not represent actual performance. Global Stocks represented by MSCI All Country World Index (gross div.) and Treasury Bills represented by US One-Month Treasury Bills. Globally diversified allocations rebalanced monthly, no withdrawals. Data © MSCI 2019, all rights reserved. Treasury bills © Stocks, Bonds, Bills, and Inflation Yearbook™, Ibbotson Associates, Chicago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield).
4. Expectations and past results are not always in line, so take the backwards looking returns metrics with a grain of salt.