This year we have seen a return of volatility to the markets. By May the Trump Administration ramped up rhetoric and then implementation of tariffs against China and other countries, causing uncertainty and retaliatory reactions from other governments. As a result, equity market returns have begun to bifurcate. Domestic stocks have been on a nice run and are positive on the year. Developed international and emerging market stocks have been under pressure, with the concerns of the tariff impacts negatively impacting their prices.
Interest rates have weighed on bonds this year. As a general rule, which interest rates increase, bonds tend to fall in value. The hardest hit bonds when interest rates rise are the long-term bonds, and this year is no exception. As economic conditions are positive, credit quality has been less of a factor in bond returns and rather the duration of the bonds that have determined performance. At some point we will see a pause in the increase of interest rates, but we expect to see increases at least through 2019. Emerging market debt denominated in local currencies have recognized significant losses, as the dollar has rallied significantly and the impacts of tariffs are expected to have an impact on the debt of those countries.
In "alternative" assets we have seen small gains in domestic real estate, natural resources, and broad commodities. Inflation has started to pick up, which generally impacts commodities and natural resources in particular. The general consensus is that gold tends to do better in inflationary times, but the data is fairly weak to support this thesis. Gold has decreased in value year-to-date in the United States as the equity markets have increased, but is still viewed as a safe haven in other countries.
We will expand upon these themes in our podcast.
The general takeaway from these moments in time is that there are times when diversification does not work.
This does not mean that you should abandon asset allocation principles for a short time horizon. Diversification does not work every time, it works over time.
While we stay away from forecasting what the equity markets will do, we leave you with a chart to consider. Which market do you think will do the best over the next ten years?