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Quarterly Market Review: Q4 2018

January 30, 2019

Predictably Bad Decisions 

 

People make bad decisions, but they make them in predictable and systematic ways!

 

Have you ever (…and I already know you have!) been confronted at the checkout counter when you were about to purchase something, only to learn that if you spent a little more money, you would be eligible for a discount on your purchase? More often than not, people will decide to make additional purchases to qualify for a discount, only to really have spent more money in total at the end of the transaction. A now long-gone local auto dealership had a famous TV commercial tagline of: “If you don’t come see me today, I can’t save you any money!” The dealership, of course, had no interest in saving you money… they wanted you to spend tens of thousands of dollars on a new car! Yet the phrasing creates an interesting sense of self-benefit by shifting the focus from spending to saving.

 

Why do we buy more to save more? From an economic perspective, self-punishing decisions are difficult to explain. Rational people are supposed to consider the options, then pick the one that maximizes the benefit to them. Yet actual economic life is full of miscalculations, from Costco’s 6.6 pound tub of Nutella purchased at spectacular savings to the billions of dollars Americans will spend this year to service their credit card debt.

 

In the book “Predictably Irrational: The Hidden Forces That Shape Our Decisions” by Dan Ariely, a professor of Behavioral Economics at M.I.T., we are offered a simple explanation for our financial foolishness: “Our irrational behaviors are neither random nor senseless – they are systematic,” he writes. “We all make the same types of mistakes over and over.” So attached are we to certain kinds of errors, he contends, that we are incapable of even recognizing them as errors. Offered free shipping or a discount if we purchase more, we take it, even when it costs us.

 

Whether it be the tech boom and bust during 1998-2002, the real estate boom and bust between 2005-2009, or even the one-month swoons experienced in December 2018, we are impacted by our worries, fears, hopes, aspirations and biases. It’s understandable. We want to protect our hard-earned dollars, but more often than not, actions born of these fears and biases regularly prove the most costly investment decisions. 

 

That doesn’t mean that the urge to react to markets ceases with experience. In fact, I think it gets worse as we fool ourselves into thinking we learned something last time that will help us the next time. There is no evidence this is true.
 

When researchers examined how people deal with uncertainty – and there is a lot of uncertainty in market activity – they found there were consistent biases in how people approach problems with unknown outcomes. Further, these biases could be traced to mental shortcuts we all regularly use to help us make the many varied decisions we must make on a daily basis in our increasingly complex world.

 

During periods of market turmoil, humans are inclined to make decisions that are not rooted in empirical reasoning, and impulsive decision-making is made worse in periods of stress. People succumb to common and predictably bad decisions, like trying to time the market based on what you think will happen. These decisions come from the best of intentions and desired outcomes, but from our perspective, your investment approach should only change as you change (your time horizon, circumstances, risk tolerance, etc.) – not as the market changes. With a properly constructed and diversified portfolio, data shows that over the long run, your discipline will be rewarded!

Economic Indicators at a Glance

 

Below you’ll find a snapshot of some top-line economic indicators, followed by the Quarterly Market Review. 

 

Data source: Trading Economics. 2018.

Market Summary
Fourth Quarter 2018 Index Returns

Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Market segment (index representation) as follows: US Stock Market (Russell 3000 Index), International Developed Stocks (MSCI World ex USA Index [net div.]), Emerging Markets (MSCI Emerging Markets Index [net div.]), Global Real Estate (S&P Global REIT Index [net div.]), US Bond Market (Bloomberg Barclays US Aggregate Bond Index), and Global Bond Market ex US (Bloomberg Barclays Global Aggregate ex-USD Bond Index [hedged to USD]). S&P data © 2019 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. 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. Bloomberg Barclays data provided by Bloomberg.

World Stock Market Performance

MSCI All Country World Index with selected headlines from Q4 2018

 

 

 

These headlines are not offered to explain market returns. Instead, they serve as a reminder that investors should view daily events from a long-term perspective and avoid making investment decisions based solely on the news.

 

Graph Source: MSCI ACWI Index [net div.]. MSCI data © MSCI 2019, all rights reserved.

It is not possible to invest directly in an index. Performance does not reflect the expenses associated with management of an actual portfolio. Past performance is not a guarantee of future results. 

World Asset Classes

Fourth Quarter 2018 Index Returns (%)

 

Equity markets around the world posted negative returns for the quarter. Looking at broad market indices, emerging markets outperformed developed markets, including the US. 

 

Value stocks were positive vs. growth stocks in all markets, including the US. Small caps underperformed large caps in the US and non-US developed markets but outperformed in emerging markets.

 

REIT indices outperformed equity market indices in both the US and non-US developed markets.

 

Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. 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 2018, 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).

U.S. Stocks 

Fourth Quarter 2018 Index Returns

 

US equities underperformed both non-US developed and emerging markets. Value outperformed growth in the US across large and small cap stocks. Small caps underperformed large caps in the US. 

 

Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Market segment (index representation) as follows: Marketwide (Russell 3000 Index), Large Cap (Russell 1000 Index), Large Cap Value (Russell 1000 Value Index), Large Cap Growth (Russell 1000 Growth Index), Small Cap (Russell 2000 Index), Small Cap Value (Russell 2000 Value Index), and Small Cap Growth (Russell 2000 Growth Index). World Market Cap represented by Russell 3000 Index, MSCI World ex USA IMI Index, and MSCI Emerging Markets IMI Index. Russell 3000 Index is used as the proxy for the US market. Frank Russell Company is source and owner of trademarks, service marks, and copyrights related to Russell Indexes. MSCI data © MSCI 2019, all rights reserved.​

Real Estate Investment Trusts (REITs)

Fourth Quarter 2018 Index Returns

 

Non-US real estate investment trusts outperformed US REITs in US dollar terms.

 

Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Number of REIT stocks and total value based on the two indices. All index returns are net of withholding tax on dividends. Total value of REIT stocks represented by Dow Jones US Select REIT Index and the S&P Global ex US REIT Index. Dow Jones US Select REIT Index used as proxy for the US market, and S&P Global ex US REIT Index used as proxy for the World ex US market. Dow Jones and S&P data © 2019 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.

Select Country Performance

Fourth Quarter 2018 Index Returns

 

In US dollar terms, New Zealand and Hong Kong recorded the highest country performance in developed markets, while Austria and Norway posted the lowest returns for the quarter. In emerging markets, Brazil and Indonesia recorded the highest country performance, while Columbia and Pakistan posted the lowest performance.

Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Country performance based on respective indices in the MSCI World ex US IMI Index (for developed markets), MSCI USA IMI Index (for US), and MSCI Emerging Markets IMI Index. All returns in USD and net of withholding tax on dividends. MSCI data © MSCI 2019, all rights reserved. UAE and Qatar have been reclassified as emerging markets by MSCI, effective May 2014.

Fixed Income

Fourth Quarter 2018 Index Returns

 

Interest rate changes across the US fixed income market were mixed during the fourth quarter of 2018. The yield on the 5-year Treasury note declined 43 basis points (bps), ending the quarter at 2.51%. The yield on the 10-year Treasury note decreased 36 bps to 2.69%. The 30-year Treasury bond yield decreased 17 bps to finish at 3.02%. For 2018, yields on the 10-year Treasury and 30-year Treasury increased 29 bps and 28 bps, respectively.

 

In terms of total returns, short-term corporate bonds increased 0.78% during the quarter. Intermediate-term corporate bonds had a total return of 0.58%.

 

Total returns for short-term municipal bonds were 1.10% for the quarter. Intermediate-term municipal bonds returned 2.00%.

 

 

 

 

 One basis point equals 0.01%. Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. 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. 

 

This report was prepared by Gregory Saliba.

 

 

Gregory Saliba

President, Taurus Capital Management

saliba@tauruscap.com

(503) 756-2972

 

 

 

 

20+ years in Corporate Finance, Debt Capital Markets and Investment Management

2010 Oregon Ethics in Business Award Recipient

Public Speaker on Risk, Behavioral Finance and Ethics

Finance Faculty Member (12+ years)

  • Willamette University, Atkinson Graduate School of Management

  • Portland State University, School of Business Administration

Extensive Community Involvement

 

 

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