Third Quarter Market Update

It has been ten years since the Lehman Brothers declared bankruptcy and surged the world into the global financial crisis. There have been 3 different Chairs of the Federal Reserve in that time frame. The world has changed a lot since then. Chairman Powell made this clear in his opening remarks following the September fed meeting, stating “Our economy is strong. Growth is running at a healthy clip. Unemployment is low, the number of people working is rising steadily, and wages are up. Inflation is low and stable. All of these are very good signs.” Jerome Powell Chairman of the Federal Reserve 09/26/2018.

Since the financial crisis, a great deal has been revealed about how bad things truly were. Back in 2014, Ben Bernanke stated “September and October of 2008 was the worst financial crisis in global history, including the Great Depression.” and also that “12 of the 13 most important financial institutions in the U.S. were at risk of failure within a period of a week or two.” (1).

It can be hard to believe that just a mere ten years ago things were that dire. The financial system was so close to the brink that one false move could have resulted in the collapse of our entire monetary system. This would have had an unimaginable impact, far greater than what we experienced.

Today the financial crisis has started to feel like history. Memories have begun to fade, and risk now seems comfortable for many investors. Investors are inundated with "experts" on the business channels sharing their opinions on the market as if they have a working crystal ball. Investors would be wise to remember who employs many of the top analysts and market commentators. Many work for the investment firms that needed to be bailed out in 2008 because they did not properly handle their investments.

At FSG we have always said we do not own a crystal ball. We do not know when the next recession will hit. What we do know is that right now the economy is strong. We also know that all markets go through cycles of growth and retraction (ups and downs). Long-term market growth offsets the painful retractions. Additionally, we know that one of the cornerstones of our investment philosophy can make retractions a little less painful. That cornerstone is diversification.

Since the great recession turned a corner, markets have rewarded those who have shunned diversification. Simply buying the right handful of U.S. Large Growth stocks would have rewarded investors with exorbitant returns. This is the same asset class that lambasted investors with returns of -20% or more for three years in a row during the early 2000s. This is one of many examples of time periods where one particular asset class drastically underperforms the rest of the market.

As this current market is getting long in the tooth, memories and lessons of the past remind us to remain diversified. In all of our portfolios, we own multiple asset classes designed to absorb isolated negative returns and ideally numb the pain of the next inevitable recession. Owning multiple asset classes often means saying that we are sorry because unfortunately when a portfolio is truly diversified something is almost always down. Another way of saying that is if everything is up at once you are NOT diversified. With that in mind, let us examine how key asset classes have performed this year vs. 2008.