January Recap: Interesting Start to the Year by Jack Moller

Unlike last year’s dismal start (worst first six weeks in history!), markets around the world were generally firmer this year.  There was some continued consolidation in many of the post-election market moves – U.S. stocks bounced back and forth in a narrow range, treasury yields stopped soaring, and the international equity markets continued the firming process begun in December.  In fact, the emerging market equities which had been hit so hard in November in the wake of the election completely reversed and were the big winners in January gaining almost 6%. 

Of course, the market start was fairly boring in comparison to what was going on in our nation’s capital!  I will most definitely avoid any type of partisan commentary, yet what I would say is that the new administration seems intent on sharply diverting course from the past.  If they succeed, we might also witness a sharp transition in markets.  In the past decade or so, we’ve seen rock-bottom interest rates and fears of deflation driving central banks around the world to undertake unprecedented monetary policies.  In fact, generally, government involvement in the economies of the developed world has increased dramatically.  The result has been relatively calm, low-volatility, slow-but-positive economic growth, and record highs in many financial assets – in particular (U.S.) stocks and bonds.  Strong financial markets with slow growth and low returns on savings have no doubt decidedly contributed to the growing wealth inequalities. 

From my perspective having graduated from college and entered the workforce in the late 70s / early 80s with double-digit inflation and interest rates, these past years have been unfathomable. Perhaps, the paradigm is starting to shift back.   Maybe we are going to see rising interest rates, focus shifting back to inflation, accelerated growth (or the reverse and a return to recession), financial assets becoming more volatile, and expensive U.S. markets beginning to underperform.  Of course, nobody knows but it does seem like we might be getting a bit overdue for the pendulum to begin to swing back in the other direction.

Broadening Rally

As noted above, and previously in these commentaries, the weakening dollar provides a tailwind for the international investments – both stocks and bonds – as they are denominated in other currencies.  In other words, a German stock selling in Euros automatically becomes more valuable in terms of dollars when the dollar becomes less valuable vs. the Euro.  Over time, we expect the currencies to have a limited long-term impact but in the short term, these moves do make a difference.  Accordingly, the non-U.S. equities did particularly well last month. 

As investment advisors, we do hope that this market advance continues to broaden internationally so that the diversification begins to pay off after being a real drag the past few years.  The U.S. stock market has accounted for nearly all of the global stock market since 2014 and approximately 70% of the world’s stock market growth since 2009.  Whether this continued U.S. outperformance continues in the short-term is anybody’s guess.  In the long-term, history has demonstrated that by adding international stocks investors can reduce their risk without sacrificing long-term return.