Despite Friday’s poor showing, last week was positive for developed markets, as the S&P 500® Index picked up 2.16%, and the MSCI EAFE® Index managed to tack on 0.2%. U.S. equities were led by a rally among the large pharmaceutical manufactures, driving the sector to a 4.13% advance. This was followed by 3%+ gains among the electrical utility stocks and the food and beverage companies in the consumer staples. In a change from recent weeks, no sector posted a loss last week; however, the S&P Small Cap 600 Index fell a fractional 0.08%. Commodity prices were broadly lower last week, with the price of crude oil losing another 4.7%, as the number of exceptions granted regarding the sanctions on Iranian oil far exceeded expectations. This drop in crude oil prices led to a 5.1% decline in gasoline prices. Industrial metals were led lower by a 3.6% drop in copper prices. The agricultural sector experienced overall weakness of roughly 2%, as strong harvest data and concerns over market access continued to collide. Interest rates were notably active last week as witnessed by the ten-year treasury trading up to a 3.2447% yield only to rally back to 3.1819% on Friday. Investors sold equities in favor of bonds over rising concerns of slowing global economic growth following data releases in the U.K. and Germany. The resumption of the gradual rise in interest rates continued to have an impact on equity performance as the Russell 1000 Value Index advanced 2.28% to the Russell 1000 Growth Index gain of 1.72%.
The most common concern expressed by clients in 2017 had to do with the investment of cash, whether it was from the sale of a business, real estate or even another investment. The fear being that, with the market having done so well for so long, it was too late to invest in stocks. Furthermore, interest rates were so low, it did not make sense to lock up funds for so little yield, and with short-term rates just above the rate of inflation, after paying taxes they were losing ground. For those to whom we recommended the capital preservation models, there was resistance as those portfolios have an allocation to equities. While that may seem counterintuitive, I offer Exhibit 1, in which you will see that the rolling twelve-month positive return probability is better for those portfolios with a ten to twenty percent equity allocation. Yes, over sixty-eight years of rolling twelve-month periods, you stood a better chance of generating a positive return, even in the most conservative posture, by allocating part of your assets to stocks. This also enhanced the average rate of return. The return of volatility to financial markets this year has rightfully shaken investors and caused them to question their approach, but as this illustration points out, prudence for prudence’s sake is not a virtue; fortune favors the bold.
Exhibit 1 (Source: Crandall, Pierce & Company)
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