From Dimensional Fund Advisors
The year 2019 served up many examples of the unpredictability of markets.
Interest rates that U.S. policy makers expected to rise fell instead. American consumers’ confidence weakened as the year began,[1] and news headlines broadcast fears of an economic slowdown. But investors who moved onto the sidelines may have missed the gains in the U.S. stock market. As of the end of October, the S&P 500 was up more than 20% for the year on a total-return basis. That put it on course for the best showing since 2013 were the gain to hold through December.
Outside the U.S., Greece—the site of an economic crisis so dire some expected the country to abandon the euro earlier this decade, and a country whose equity market lost more than a third of its value last year—had one of the most robust stock market performances among emerging economies in 2019. On top of that, Greece issued bonds at a negative nominal yield, which means investors paid for the privilege of lending the government cash.
Taken as a whole, it’s a reminder that the prediction game can be a losing one for investors.
Up or Down?
A closer look at interest rates and the bond market shows just how unpredictable asset performance can be. Going into 2019, Federal Reserve officials expected economic conditions to support raising a key interest rate benchmark twice. Instead, policy makers lowered it three times.
In the market for U.S. Treasuries—where market participants set interest rates—the yield curve that tracks Treasuries inverted for the first time in more than 10 years, as seen in Exhibit 1. Some long-term yields fell below some short-term yields over the summer. What’s more, yields on medium- and long-term bonds were at historically low levels at the start of the year, but they fell even lower by the end of October. Investors who made moves based on the expectation that yields would rise in 2019 may have been disappointed in how events ultimately transpired.
Exhibit 1: Shifting Curves
Yields on U.S. Treasuries of various maturities since the end of 2018
Trading Places
Events weren’t any easier to anticipate in the global equity markets, where no evident link appears between markets that performed well last year and those that have excelled this year, as Exhibit 2 shows.
Among the 23 developed market countries,[2] only one country was a Top 5 performer for 2018 and 2019: the U.S. The strongest-performing market in 2018—Finland—ranked 22nd in 2019 through the end of October. Among emerging markets, Greece swung from a 37% decline in 2018 to a 37% advance in 2019 through the end of October.
Exhibit 2: Changes in the Ranks
Performance of equity markets in 23 developed and 24 emerging economies
Perennial Wisdom
History has shown there’s no compelling or dependable way to forecast stock and bond movements, and 2019 was a case in point. Neither the mainstream prognostications nor the hindsight of recent strong performance predicted outcomes in 2019.
Rather than basing investment decisions on predictions of which way debt or equity markets are headed, a wiser strategy may be to hold a range of investments that focus on systematic and robust drivers of potential returns. Investors who were broadly diversified across asset classes and around the globe were in a position to potentially enjoy the returns that the markets delivered thus far in 2019. Last year, this year, next year—that approach is a timeless one.
—From Dimensional Fund Advisors
FOOTNOTES
[1] Based on readings from the Conference Board Consumer Confidence Survey and the University of Michigan Index of Consumer Sentiment.
[2] Markets designated as developed or emerging by MSCI.
DISCLOSURES
Dimensional Fund Advisors LP is an investment advisor registered with the Securities and Exchange Commission.
Past performance is no guarantee of future results. There is no guarantee an investing strategy will be successful. Investing risks include loss of principal and fluctuating value.
Investors should talk to their financial advisor prior to making any investment decision. There is always the risk that an investor may lose money. A long-term investment approach cannot guarantee a profit.
Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio.
All expressions of opinion are subject to change. This information is intended for educational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services.