“The illusion that we understand the past fosters overconfidence in our ability to predict the future.” - Daniel Kahneman

Optimism around future growth opportunities, strong economic data, and expectations for lower interest rates guided stocks to new all-time highs in the first quarter - the first new high for global stocks since November 2021. Global stocks, as measured by the MSCIAll-Countries World Index (ACWI), were up 8.2% in the first quarter. U.S.stocks, as measured by the S&P 500 Index, returned just over 10% for the quarter. Optimism even spread to once stagnant economies, such as the Japanese stock market, which saw its first new all-time high in over 34 years. Bonds, on the other hand, continue to trade with more mixed results as the average US bond, as tracked by the Bloomberg US Aggregate Index (AGG), was down -0.8% for the quarter.

The recent run-up to new highs for stocks, particularly with leadership from the technology sector, has drawn some comparisons to the late 1990’s internet bubble. There are several arguments that could be made to support or oppose the bubble comparison.  The element that sometimes gets lost in the internet bubble narrative is that while the market experienced a significant drawdown in the early 2000’s, the general aspirations behind the internet theme came to fruition over the ensuing decade. Today, many of these internet related companies, such as Microsoft, Amazon and Google are some of the most valuable companies in the world. One lesson from the 1990’s market that can be applied to today is that maintaining adherence to long-term investment principles is just as important in a bull market as it is in a bear market.

Many of the mistakes made in the 1990’s market can be attributed to not maintaining proper investment discipline. One key mistake was overconfidence that the internet-fueled stock market run, that averaged nearly 25% per year from 1995 to 2000, would continue uninterrupted and ultimately led investors to take on more risk than was prudent through lack of diversification.

Like previous bull markets, recent performance of stocks and bonds provides meaningful information on how markets are being valued. Over the period from 2010-2023, U.S. stocks, as measured by the S&P 500 Index, have outperformed longer term averages with a 13% annual return during the period versus a 7% average annual return from 2000-2023. On the other hand, recent bond performance has trailed longer term averages with 2.5% annual returns relative to the longer 2000-2023 average of a little over 4% annually. These return relationships between stocks and bonds fall within longstanding investment expectations, which we have seen over most periods throughout history.

However, the long-term relationship between stock and bond investments has not always been consistent, and there can be significant periods of time where bonds outperform stocks.  We last experienced this reversal in performance following the 1990’s dot-com market run-up. From 2000 through 2009, the average annual return for the S&P 500 Index was -1%, but the Aggregate Bond index averaged 6.3% annually.  

The ever-changing relationship between different asset classes and unpredictability of future events drive home the merits of maintaining diversification in the investment portfolio. A balanced 50/50 allocation between the stocks and bond indexes provided positive average returns of 2.2% during the negative first decade of the 2000’s for stocks. Over the longer 2000-2023 time period, the balanced allocation results were not too dissimilar from an all stock allocation, averaging 5% annually versus 7% annual for the S&P 500 Index - despite volatile periods from both stocks and bonds.

The diversification factors that have proven to be beneficial to investors over the last several market cycles remain prudent in today’s market environment. At times, diversification doesn’t always feel good, but over the long-term, diversification has paid off for investors through greater consistency in performance.

While understanding history does not predict the future, adhering to sound investment principles, like diversification and regular asset rebalancing, will be beneficial in helping to achieve long-term investment goals.  Whether stocks continue to reach new highs over the coming months or years, or momentum is disrupted with a period of market volatility; there is optimism in the long-term outlook for investment strategies that put into practice these investment principles.

The first quarter provided a great start to the year, but there are still many known and unknown hurdles to face this year, including the upcoming elections.  As we look forward to the rest of the year, this second quote from the Nobel Prize economist, Daniel Kahneman, seems fitting: “It's a wonderful thing to be optimistic. It keeps you healthy and it keeps you resilient.”
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Investing involves risks, including possible loss of principal. The opinions expressed may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources deemed to be reliable, are not necessarily all inclusive and are not guaranteed as to accuracy. Past performance is no guarantee of future results. There is no guarantee that any forecasts made will come to pass.

Investment Advisory Services are provided through True Link Financial Advisors, LLC, (the “Adviser”) an investment adviser registered with the U.S. Securities and Exchange Commission (“SEC”) and wholly-owned subsidiary of True Link Financial, Inc. (“True Link Financial” and, together with the Adviser, “True Link”) Registration with the SEC does not imply a certain level of skill or training nor does it constitute an endorsement of the advisory firm by the SEC. The performance of investments will vary day to day in response to many factors. Asset allocation strategies are subject to the volatility of the financial markets, including without limitation that of the underlying investment options’ asset class. An investment is subject to a high degree of risk, including the risk of loss of an investor’s entire investment, and diversification does not ensure a profit or guarantee against a loss. Nothing contained herein is considered an offer to sell or a solicitation of any offer to buy any securities.

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