"There cannot be a crisis. My schedule is already full." - Henry Kissinger
As we began the year, many thought the 7-year rally had ended, but not so. Stock market investors breathed a sigh of relief as January losses were more than recovered in March, so U.S. stocks earned 1.4% in the quarter, although foreign markets declined 3% as measured by EAFE. It would seem that the scare is over. Nevertheless, I'm sticking with my forecast for a 19% loss in the US stock market this year.
Interestingly, diversification worked in the first quarter, with gold, foreign bonds and real estate performing quite well, much better than stocks.
Here's What Happened This Past Quarter
In the following, we report on the details of U.S. and foreign stock market performance. As you'll see, most market segments came through okay, but some disappointed. It's been challenging.
The stuff in the middle performed best in the quarter with mid-cap outperforming large and small-cap, and core outperforming value and growth. Style performance ranged from a high of 4% for large-cap value to a low of -9% for small-cap growth. Small growth companies are very risky. The total market returned 0.8%, a little less than the S&P 500's 1.3% gain. We use Surz Style Pure® classifications throughout this commentary.
The performance range across sectors was even larger. Telephone and utility companies earned a substantial 15% return, while healthcare firms lost 8%. That's a 23% spread. Energy prices rebounded in March, so energy stocks enjoyed a positive 4% return for the quarter.
Drilling deeper into US market segments, small-cap growth material stocks performed best with a 27.5% return, while small-cap growth healthcare stocks lost the most, with an equal and opposite 27.7% loss.
Looking outside the US, foreign markets earned 0.3% in US$, approximating the U.S. stock market's 0.8% gain and exceeding EAFE's 3% loss. Unlike the US, smaller companies have performed best, earning 1% versus minor losses for the rest of the market. But like the US, value stocks have led with a 2% gain, while the rest of the market has lost 4%.
Latin America and Canada left the rest of the world in their dust, earning double-digit returns of 14%, while the next best country earned only 4% and the US was flat. From a global perspective, EAFE was easy to beat because it has no allocation to Canada and Latin America.
Looking in more detail, Canada and Latin America were strong in every segment except Canadian healthcare, losing 64%, the worst performing segment in the world. The best performing segment was Canadian materials with a 28.4% return.
How to Use This Information
It just keeps getting better, until it doesn't. After 7 years of extraordinary growth, stock markets are showing signs of weakening. No one knows what lies ahead, but we all have outlooks on the economy and the stock market, and adjust our thinking as results roll in. I personally remain surprised and grateful that stocks have performed so well in the past 7 years, following the 2008-2009 meltdown; it's been a long-term reversal. We can use the information above to test our personal outlooks, to see which are unfolding as we think they should and which are not, with the intention to clear the haze from those crystal balls.
We can also use this information to evaluate our investment managers, and to put an end to the continuing disappointments from active investment managers. Specifically, we need to stop using peer groups because we invariably end up hiring losers. We need to use Success Scores instead.
Success Scores are especially valuable for hedge funds since hedge fund peer groups are just plain silly. The beauty of hedge funds is their uniqueness - no two are alike. "Unique" means "without peers."
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.