U.S. stocks continued their upward march in October. Larger-cap stocks (Vanguard 500 Index) returned 2.3 percent, bringing their year-to-date gain to 16.8 percent. We are now one year removed from the last time larger-cap U.S. stocks dropped during a month (they fell 1.8 percent last October). Historically, autumn has been more volatile for stock markets. October challenged this precedent. The CBOE Volatility Index (VIX) averaged 10.13 during October, the lowest average monthly reading since the VIX’s inception in 1990.
Economic data has also been strong. The most recent third quarter estimate measured GDP growth at 3 percent, which follows a second quarter growth rate of 3.1 percent. This is the first time in three years that the U.S. economy has expanded in two consecutive quarters at more than 3 percent. The current fourth quarter forecast from the Federal Reserve Bank of Atlanta is 2.9 percent. It’s worth noting the economy has not expanded by 3 percent or more in three consecutive quarters since 2004/2005.
The U.S. technology sector was the big winner during October. Information technology stocks within the S&P 500 Index gained 7.8 percent in October and have returned a whopping 37.2 percent so far this year. Telecom services was the poorest-performing sector in October—falling 7.6 percent. However, this sector has narrowed to just three companies over the years and is now a very small piece of the broader index.
U.S. investors in foreign equities have benefited from a weaker dollar in 2017, but this has started to shift in recent months as the dollar has strengthened versus foreign currencies. Emerging-market stocks (Vanguard FTSE Emerging Markets ETF) narrowly outpaced larger-cap U.S. stocks in October, returning 2.4 percent. Developed international stocks (Vanguard FTSE Developed Markets ETF) gained 1.8 percent and European stocks (Vanguard FTSE Europe ETF) were up a modest 0.5 percent (both returns in U.S. dollar terms). For the year so far, foreign stock returns remain ahead of larger-cap U.S. stocks: emerging-market stocks are up 27.2 percent, European stocks are up 25.1 percent, and developed international stocks are up 23.3 percent.
Interest rates in the United States were largely unchanged in October; the 10-year U.S. Treasury bond yield inched up 5 basis points. Domestic core bonds (Vanguard Total Bond Market Index) gained 0.1 percent in the month and are now up 3.2 percent this year. Credit spreads also remained essentially unmoved in October. U.S. high-yield bonds (BofA Merrill Lynch U.S. High-Yield Cash Pay Index) gained 0.4 percent last month and floating-rate loans (S&P/LSTA Leveraged Loan Index) were up 0.6 percent.
Writing and reading about monthly returns may help us feel like we are “informed” and have a grasp of what’s happening in the markets; however, such brief periods are not that informative and investors should always think about it in the context of a longer investment horizon. The following excerpt from the latest issue of Graham & Doddsville is part of Howard Marks’s (Oaktree Capital) answer to a question about whether investing time frames have changed as a result of the information age (emphasis added is ours):
Well, I don’t know if it’s because of the information age. I think a lot of it is because of the pressure on investors for performance. We used to think about holding stocks for five years, and at the end of the year, it took a week or two before the bookkeepers figured out what your return was for the year. I may be exaggerating, but then it became a matter of an hour, then it became a matter of a minute. Today, everybody has their performance every second in real time, and in one of the biggest mistakes that took place in this process, the clients decided to put a lot of emphasis on short-term performance. It tells you nothing. In fact, if you put a manager on probation because he had a bad quarter, if he sells the stocks that are down and buys the stocks that are up, you have forced him into a poor decision. But it has happened, and now everybody wants to know how you did last quarter. Nobody says, “how did you do in the last ten years?” which is what matters. Every manager and every approach has times when he, she, or it is out of favor.
In theory, an investor who skillfully changes his approach and keeps up with the demands of the market—if that person existed—could do well all the time. Very few people, if any, satisfy that criterion. Most great investors stick to an approach through thick and thin, and yet every approach goes out of favor sometimes, which means that every investor has periods in the dog house. To be a great investor, you must have an approach, and you have to stick to it, despite the times when it’s not working. If the clients look at the performance every six months, three months, month, week, then it becomes harder for the manager who wants to keep the account to stick to his approach. Instead you start buying the things that have gone up—we call that chasing. You sell the things that have gone down—we call that puking. That can’t be the right formula.
We wholeheartedly agree with Marks’s sentiments. Shorter-term fluctuations in markets are unpredictable and often little more than random “noise.” We have an investment philosophy and discipline at OJM Group that guides our portfolio management through thick and thin. We may adjust our process from time to time based on new insight or significant developments in the investing environment, but we are always grounded in our fundamental investment beliefs and long-term investment philosophy. We believe this discipline is a key component of the long-term value we provide clients.
—OJM Group Gregory Wealth Management Team (11/3/17)
