Bristlecone Blog

Global markets continued their recovery in the third quarter, albeit at a more measured pace than the second quarter. Once again, every major asset class notched positive returns, with stocks from Emerging Markets and Natural Resources leading the way. On the bond side, we note the excellent returns from US TIPS over the past 12 months, supported by lower interest rates and a change in inflation expectations. Finally, the other assets category performed well with average returns exceeding U.S. bonds' but lagging equities' overall.

The question we are asked more than any other these days goes something like this: how is it possible that the stock market has recovered so strongly since March while the economic and other news has been so bad? We feel obliged to answer this question, and we will shortly, but before doing so we need to get our hedges in. We simply don't know yet whether the stock market is accurately foretelling a return to normal economic growth or if its recovery is just a temporary, artificially sweetened pop.

We hope this letter finds you and your loved ones healthy and safe during the COVID-19 pandemic. COVID-19 is first and foremost a human tragedy of vast proportion. As a society, we are adapting to challenging circumstances, the most important of which is the risk to our health and lives. The financial consequences have been an unprecedented worldwide economic shock and monetary stimulus to mitigate its impact.

Stocks rallied strongly in Q4, and full-year returns for both stocks and bonds reflected a sharply positive reversal from 2018 (when virtually every asset class experienced negative returns). In 2019, many diversified stock and bond indexes recorded their best gains in several years. Domestic growth stocks led the way, with the S&P 500 index advancing 31.5%--the index’s best return since 2013. Small-cap and international benchmarks also delivered double-digit gains.

Shares of the largest U.S. companies continued their outperformance of foreign developed markets during the 3rd quarter. Over the past 12 months, their return also trounced both those of smaller U.S. companies (+4.3% vs. -8.9%) by a surprisingly wide margin.

Congratulations to the USA Women's National Team, which won the 2019 FIFA Women's World Cup earlier this month by beating the Netherlands 2 - 0. (...) As on the field, though, the US keeps mounting victories in terms of stock market performance, too, against the rest of the world.