Domestic and international stock, bond, and real estate markets continued their winning ways during the 3rd quarter of 2020. The sector and style leadership themes of the first half of the year continued through the third quarter. We review specifics below.
For the quarter, emerging markets stocks led, up 9.56%, with U.S. stocks up 9.21%, and international developed stocks up 4.92%. Global real estate was up 2.37%, global bonds ex U.S. were up 0.68%, and U.S. bonds were up 0.62%.
Over the last year, U.S. stocks have led, up 15%, with emerging markets up 10.54%, and international developed stocks up 0.16%. Global real estate has been off 18.58% over the last year, while U.S. bonds were up 6.98% and global bonds ex U.S. were up 1.82%.
Looking at best and worst quarters by investment class over the last twenty years is instructive. U.S. stocks had their best quarter in Q2 2020, up 22%, and worst quarter in Q4 2008, down 22.8%. International developed stocks had their best quarter in Q2 2009, up 25.9%, and worst quarter in Q1 2020, down 23.3%. Emerging markets saw their best quarter in Q2 2009, up 34.7%, and worst in Q4 2008, down 27.6%. Global real estate? Best quarter in Q3 2009, up 32.3% and worst quarter in Q4 2008, down 36.1%.
In the bond category, U.S. bonds had their best quarter in Q3 2001, up 4.6%, and worst quarter in Q4 2016, down 3%. Global bonds ex U.S. had their best quarter in Q4 2008, up 4.6%, and worst quarter in Q2 2015, down 2.7%.
Large growth stocks continued their leadership, up 13.22% for the quarter and 24.33% YTD, with small value the laggard, up 2.56% for the quarter, and down 21.54% YTD. Over the last ten years, this spread has been consistent, with the ten-year annualized return of large growth stocks at 17.25%, and the same number for small value at 7.09%. As noted in other commentaries, the performance of large growth has been driven and dominated by fewer than ten large companies over the last ten+ years.
International Developed Stocks
The story is similar with international developed stocks. For the quarter, growth stocks are up 8.51%, and up 5.13% YTD, while value stocks are up 1.35% for the quarter, and down 18.88% YTD. Over the last ten years, growth stocks have returned 6.61% annually, while value stocks have returned 1.99% annually. Unlike in the U.S. however, small caps have out-performed large caps.
Emerging Markets Stocks
Again, growth stocks led, up 14.15% for the quarter, and up 12.41% YTD. Value stocks were up 4.66% for the quarter and are off 14.23% YTD. Over the last ten years, growth stocks have returned 5.29% annually, while value stocks are off 0.44% annually.
REIT performance domestically and internationally have tracked each other closely. For the quarter, Global REITs ex U.S. are up 4.57%, while U.S. REITs are up 0.83%. YTD, both are off just more than 21%, and over the last year, U.S. REITs are off 22% while global REITs ex U.S. are off 18%. Over the last ten years, there is a bit of divergence, with U.S. REITS up 7.3% annually, and global REITs up 4.13% annually.
Turning our attention to bonds, we find that high-yield (junk) bonds led the third quarter, up 4.6%, followed by TIPS at 3% and intermediate government bonds at 2%. YTD, government long bonds have led, up 21%, followed by TIPS, up 9%, and intermediate government bonds, up 4%. Over the last ten years, the variance shrinks, with long government bonds up 7.20%, high-yield bonds up 6.45%, and municipals up 4%.
As an illustration of the divergence in stock performance, let’s look at three metrics from four well-known companies – Amazon (AMZN), Wal-Mart (WMT), ExxonMobile (XOM), and Southern Companies (SO), owner of Georgia Power and several other utilities. We look at YTD stock performance, dividend, and trailing twelve-month price-earnings ratio, or TTM PE. The PE ratio tells us how much we pay for every dollar of earnings.
As of close of business on Friday October 9, the price of AMZN stock is up 78% YTD, the company pays no dividend, and the TTM PE is 126. This means that for every dollar of earnings, you will pay $126. The price of WMT is up 20% YTD, the dividend is 1.5%, and the TTM PE is 22.76.
The price of XOM is down 50% YTD, the dividend is 10%, and the TTM PE is 23. The price of SO is down 8% YTD, the dividend is 4.35%, and the TTM PE is 19.
How do you get your money back from AMZN? Sell the stock and pay capital gains. How do you get your money back from XOM? Hold the stock ten years and collect dividends. Yes, there are variables. Will the price remain constant? Will the dividend go up or down? In spite of the variables, the contrast is stark.
What have we learned this year? We have seen and experienced, live and in color, what we have taught for years. First, diversification tempers volatility. For most, this is a significant positive. Second, make portfolio changes slowly, if at all, and preferably as driven by life events, not in reaction to market behavior. Third, the habit which best allows each of us to capitalize on market volatility is setting aside money consistently, automatically, every month. Those who have done that this year have significantly outperformed.
If and as you have questions, please call or email. As always, we appreciate the opportunity to serve.