The COVID-19 pandemic has upended life on an unprecedented global scale. As you read this note, most of us are indefinitely sheltering-in-place, worrying about our loved ones’ health, and navigating the new rhythms of our restricted daily lives. Personally, I am working from home (as are all Daintree employees), sharing the house with my wife, our two adult sons, and our dog. I am thankful to still have work, newfound family time, long walks, and no commute. These are unforeseen blessings.
Performance across most financial assets was overwhelmingly positive in 2019. Due to the breadth of market success, we might call it a “rising tide that lifts all boats” scenario. We do not expect this type of banner year to occur with any regular frequency, so our expectation for future performance is much more tempered.
Politics continues to surprise us. We saw that with the last U.S. presidential election, and we continue to see it with Brexit, the trade war, and the current impeachment proceedings. Who knows what the future holds?
“Climbing the wall of worry” is the best way to describe markets in 2019 so far. Investopedia (an online investment encyclopedia) describes and comments on the “wall of worry” as:
Wow, what a fast turnaround! After a bruising end to 2018 that saw all asset classes except Fixed Income post negative returns, global financial markets rebounded strongly over the three months ended March 31, 2019. Year-to-date, markets have made back most, if not all, of what they lost in 2018, with all asset class returns ranging from low single-digits to over twenty percent.
Happy New Year! Even a week into this New Year, we keep celebrating given the better returns so far in 2019. In 2018, investors with average risk generated mid-single digit negative returns.
Diversification: The Only “Free Lunch” Doesn’t Feel So Free Right Now
The best performing strategy year-to-date has been to own the few high-flying stocks that are responsible for the majority of U.S. stock market returns. Against this backdrop, we feel it is an appropriate time to review Daintree’s investment strategy and why we think it has a higher probability of long-term success.
Things rarely play out the way people foresee them. Take the FIFA World Cup for example, which recently concluded its 21st installment. The tournament began with 32 national teams vying for soccer’s ultimate prize, with tournament stalwarts Germany, Brazil, or Argentina favored to lift the trophy again. Against all odds though, each of these favorites crashed out, eliminated by seemingly lesser teams. No one could have predicted this result or that the tiny nation of Croatia would make the final. However, that is the nature of a contest with numerous potential outcomes; it is unpredictable and full of surprises.
A historic era is over. For 18 months prior to January of this year, the S&P 500 experienced zero pullbacks of 5% or more. This might not sound impressive in and of itself, but put in historical perspective, this was a period of extremely low volatility. In a normal calendar year, the S&P 500 typically experiences five pullbacks of 5% or greater and one pullback of 10% or greater. However, for an extended period markets confounded this norm as asset prices experienced unabated appreciation. At the beginning of this 18-month period, a reasonable investor would assume seven or eight sizable equity market pullbacks, yet equity markets experienced none.
Are you unfazed by the markets’ lofty valuations? Equity markets do not seem too fazed by much of anything. No matter what disaster or uncertainty came our way during 2017, global equity markets (MSCI ACWI) were up in each month of the year. That is a remarkable result and a measure of calm in the face of extreme political drama, international terror, policy changes, North Korea’s nuclear threat, cyberattacks, hurricanes, wildfires, etc.
