The U.S. stock market opened positively this year. Both the Dow Jones Industrial Average and the S&P 500 reached all-time highs, with a quarterly gain of 5.2% and 6.1%, respectively. Foreign markets advanced as well; the MSCI Europe Index outperformed the U.S. for the quarter, finishing up 7.6%. The MSCI Pacific Index closed out the ninety-day period up 7.0%; however, a strengthening dollar eroded much of the gain for U.S. investors. Emerging markets stocks advanced 11.5% for the quarter adding to their strong performance in 2016. All told, the MSCI All Country World Index returned 7.1% for the first three months of 2017, and an impressive 17.7% over the trailing 12 month period.
In fixed income markets, the yield on intermediate Treasuries, which experienced a notable increase following the November elections, declined somewhat during the early months of the year. The Bloomberg Barclays Aggregate Bond Index managed a 0.82% total return for the quarter; however, last year’s rise in rates limited the total return on the index to just four tenths of one percent for the trailing twelve month period, as bond prices decline when yields increase.
Despite unusually kind market conditions, the high cost of U.S. securities is creating some market jitters (this is just one reason why your portfolio in invested in a broad range of global securities). If wealth is an asset that provides money to support financial goals (education, housing, retirement income, etc.), then the savvy investor is more concerned with the safety and sustainability of the goals (four or five year’s tuition, thirty-year’s house payments, lifetime retirement income) than with the transitory levels of various global markets. As Nobel Prize winner Robert Merton recently wrote: “…an investment that is risk-free from an asset value standpoint may be very risky in income terms.” However, most investors focus primarily on asset value. A disconnect in thinking occurs when an investor confuses stability in asset value with stability and sustainability in the cash flows needed to fund important goals. The market watchers and prognosticators never speak in terms of a portfolio designed to provide resources, over time, to pay the bills; their vocabulary tends to trap listeners into a short-term dynamic based on fear and greed; their exhortations encourage buy/sell strategies that, more often than not, enrich the traders and erode long-term portfolio value.