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It’s Kinda Different This Time
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Jason Thomas, Ph.D., CFA
Chief Economist
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The story
After strong performance in January 2018, the narrative about the US equity market shifted to the concept of a “melt up.” The term is not well-defined, but the implication was that the higher market levels are in some way unjustified. After some turbulence in February and March, the market recovered and has since reached new record highs.
The reality
It is true that standard measures of stock market valuation are high relative to their entire history (including bear markets) and that the increase in these measures is responsible for some of the market’s total return. For example, Goldman Sachs estimates that 18% of the increase of the S&P 500 since the March 2009 market bottom can be attributed to an increase in the forward-looking Price/Earnings (P/E) ratio. However, this is a small percentage of the gains relative to recent bull markets. And, due to strong earnings growth, the P/E ratio has declined since the beginning of the year despite a strong increase in the market level.
As of August 29, 2018. Sources: FactSet, Bloomberg, Goldman Sachs Investment Research.
The bottom line
Believing that “it’s different this time” can lead investors to make poor investment decisions. But insufficient appreciation for the nuances of markets is also dangerous. Investors should fully expect the market to correct at some point, but we cannot conclude that markets are overvalued simply because they are reaching new highs. In fact, by our calculations , the S&P 500 has closed within 5% of a record high on almost half of all trading days since 1980.
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| Asset Class |
Index |
Description |
| US Equities |
S&P 500 |
A cap-weighted index that is generally considered representative of the US equity market, consisting of 500 leading companies in leading industries of the U.S. Market capitalizations are generally above $5 billion representing approximately 80% of available market capitalization. |
| International Developed Equity |
MSCI EAFE |
A free float-adjusted market capitalization-weighted index that is designed to measure the equity market performance of countries considered to represent developed markets, excluding the U.S. and Canada. |
| Emerging Markets Equity |
MSCI Emerging Markets |
A free float-adjusted market capitalization index that is designed to measure the equity market performance of countries considered to represent emerging markets. |
| US Fixed Income |
Bloomberg Barclays US Aggregate |
The index covers the USD-denominated, investment-grade, fixed-rate, taxable bond market of SEC-registered securities. The index includes bonds from the Treasury, Government-Related, Corporate, MBS (agency fixed-rate and hybrid ARM passthroughs), ABS, and CMBS sectors. U.S. Agency Hybrid Adjustable Rate Mortgage (ARM) securities were added to the U.S. Aggregate Index on April 1, 2007. |
| US High Yield |
Bloomberg Barclays US Corporate High Yield |
The index measures the market of USD-denominated, non-investment grade, fixed-rate, taxable corporate bonds. Securities are classified as high yield if the middle rating of Moody’s, Fitch, and S&P is Ba1/BB+/BB+ or below. The index excludes emerging market debt. |
| US Investment Grade Credit |
Bloomberg Barclays US Corporate |
The index is a broad-based benchmark that measures the investment grade, fixed-rate, taxable, corporate bond market. It includes USD-denominated securities publicly issued by U.S. and non-U.S. industrial, utility, and financial issuers that meet specified maturity, liquidity, and quality requirements. |
| US Short Treasuries |
Bloomberg Barclays US Treasury 1-3 Year |
The index measures the performance of short term government bonds issued by the US Treasury. It includes all publicly issued, US Treasury securities that have a remaining maturity of between 1 and 3 years, are non-convertible, are denominated in US dollars, are rated investment grade, are fixed rate, and have $250 million or more of outstanding face value. |
| US Long Treasuries |
Bloomberg Barclays US Treasury Long |
The index measures the performance of long term government bonds issued by the US Treasury. It includes all publicly issued, US Treasury securities that have a remaining maturity of 10 or more years, are non-convertible, are denominated in US dollars, are rated investment grade, are fixed rate, and have $250 million or more of outstanding face value. |
| International Fixed Income |
Bloomberg Barclays Global Aggregate ex US |
The index is a measure of global investment grade debt from twenty-three local currency markets. This multi-currency benchmark includes government-related, corporate and securitized fixed-rate bonds from both developed and emerging markets issuers. The index also includes Eurodollar, Euro-Yen, and 144A Index-eligible securities, and debt from five local currency markets not tracked by the regional aggregate benchmarks (CLP, MXN, ZAR, ILS and TRY). |
| US Real Estate |
Dow Jones US Select REIT Index |
A broad measure of the performance of publicly traded US real estate securities, such as Real Estate Investment Trusts (REITs) and REIT-like securities. |
| Brazil |
MSCI BRAZIL Index (USD) |
The MSCI Brazil Index is designed to measure the performance of the large and mid-cap segments of the Brazilian market. With 53 constituents, the index covers about 85% of the Brazilian equity universe. |
| US Small Cap |
Russell 2000 |
An unmanaged index consisting of those companies considered to represent the small-cap segment of the US equity market. It is a subset of the Russell 3000 Index based on market capitalization. |
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This report is for informational purposes only, and is not a solicitation, and should not be considered investment advice. The information in this report has been drawn from sources AssetMark believes to be reliable, but its accuracy is not guaranteed, and is subject to change. Investors seeking more information should contact their financial advisor. Financial advisors may seek more information by contacting AssetMark at 800-664-5345.
Investing involves risk, including the possible loss of principal. Past performance does not guarantee future results. Asset allocation cannot eliminate the risk of fluctuating prices and uncertain returns. There is no guarantee that a diversified portfolio will outperform a non-diversified portfolio in any given market environment. No investment strategy, such as asset allocation, can guarantee a profit or protect against loss in periods of declining values. It is not possible to invest directly in an index.
Investments in mutual funds and exchange traded funds that hold equities, bonds, and other securities can decline significantly in response to adverse market conditions, company-specific events, changes in exchange rates, and domestic, international, economic, and political developments. Investments in bonds and fixed income related securities also involve market and interest rate risk (prices can decline, if interest rates increase), and default risk (an issuer being unable to repay principal and interest). High-yield bonds are generally subject to greater risk of default and volatility, than investment-grade bonds. Real estate investments are subject to credit and market risks, typically based on changes in interest rates and varied economic conditions. Investing in alternative investments, including managed futures, commodities, and currencies is not appropriate for all persons, as the risk of loss is substantial. Investments in futures involve market, counterparty, leverage, liquidity, interest rate, foreign currency, commodity, volatility, and other risks.
For more complete information about the various investment solutions available, including the investment objectives, risks and fees, please refer to the Disclosure Brochure and applicable Fund Prospectus. Please read them carefully before investing. For a copy, please visit www.assetmark.com, or contact your AssetMark Consultant or Financial Advisor.
CFA® and Chartered Financial Analyst® are registered trademarks owned by CFA Institute.
AssetMark, Inc. is an investment adviser registered with the Securities and Exchange Commission. Jason Thomas is also Chief Executive Officer & Chief Investment Officer of Savos Investments, a division of AssetMark, Inc.
©2018 AssetMark, Inc. All rights reserved.
For general public use.
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C33188 | 10/2018 | EXP 01/31/2019
628775-7913 ADV
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