In 2017, we were again reminded of the importance of following an investment approach based on discipline and diversification vs. prediction and timing. In fact, last year provided several interesting, and unexpected, examples on how best to achieve the long-term return the capital markets offer. For example: What do you get when you combine a tumultuous year for a new US president and divisive political trends in many global markets? Answer: A new record for the US stock market.
For the first time since 1897, the total return for the US stock market was positive in every single month of the year. As you may recall, a great deal of media coverage was focused on markets at all-time highs, and some investors braced themselves for a sharp drop in stock prices. Not only did the much anticipated “correction” never occur, financial markets remained remarkably calm. Out of 254 trading days in 2017, the total return of the S&P 500 Index rose or fell over 1% only eight times. By comparison, in a more rambunctious year such as 1999, it did so 92 times.
North Korea issued threats of a nuclear missile strike throughout the year and boasted that even mainland US cities were vulnerable to its newest warheads. Next-door neighbor South Korea would seem to have the most to lose if such a catastrophe occurred, but Korean stocks were among the top performers in 2017, with a total return of 29.5% in local currency and 46.0% in US dollar terms.
To many experienced analysts, Chinese stocks appeared alarmingly vulnerable as well. A gloomy November 2016 article warned that “China’s debt addiction could lead to a financial crisis.” In the article, a prominent Wall Street strategist observed: “It’s scary that China seems to be continuing its debt binge to achieve its unrealistic growth targets.” How did these dire predictions turn out? China was the third best-performing stock market in 2017 with a total return of 51.6% in local currency and 50.7% in US dollar terms.
These “surprises” from 2017 reinforce the challenge of drawing a direct link between positive or negative events in the world and positive or negative returns in the stock market.
However, it is really nothing new that financial markets surprised many investors in 2017, as they have a long history of surprising investors. For example, from 1926–2017, the annualized return for the S&P 500 Index was 10.2%, but returns in any single year were seldom close to this figure. In fact, returns for the S&P 500 Index for this time period were anywhere between 8% and 12% only six times, but experienced gains or losses greater than 20%,40 times (34 gains, six losses).
Clearly, attempting to pick only winning markets in any given period is a challenging proposition. By pursuing a globally diversified approach to investing, one doesn’t have to attempt to pick winners every time to achieve a rewarding investment experience.
Some Commentary provided by Weston Wellington, V.P. of Dimensional Fund Advisors