3Q25 Market Review
In this post, John Chesbrough gives a review of recent performance in the investment markets. There are three sections: What happened, what we expect going forward, and what we are doing as a result.
During the most recent quarter, the stock market was like a baseball player on a hot streak. The US market surged upwards, posting over an 8% gain. Global markets also grew, though by “only” 5%. Bond markets were also up modestly. This past quarter’s strength is on top of many previous quarters’ strong performance. In other words, the stock market, and in particular the US stock market, has been on a strong hitting streak.
Detailed Market Performance – a watch
The following link is a less than 5-minute narrated video of market performance and other resources in this blog post. Some people prefer a guided tour over a read. But, the tour will be too fast to read!
Detailed Market Performance – a read
To view a detailed analysis of investment performance in the US and global stock and bond markets, click on the button below.
The investment market performance report is prepared by Dimensional Fund Advisors (DFA), one of our partners in investment management and client support. If you would like to find out more about DFA, you can visit their website directly at: https://www.dimensional.com/
To continue with the baseball player analogy, streaks rarely last forever. Streaks do end – but the question is when? how badly? and most alluring of all, can we reliably predict the answer to those questions? It would be lovely if we could accurately answer the same questions for the recent investment market performance.
However, we cannot in the short-term. We can though consider the question more deeply and explore some of the reasons why reliably trying to predict short-term market movements is so difficult.
In baseball, the factors that may lead to the breaking of a streak are multi-faceted – from plain old statistics (you win some, you lose some), to salary constraints, injuries, aging of the player, and many others! In the investing world, there are again many factors – new disruptive technologies (like Artificial Intelligence), shifts in the economic landscape (the relative strength of the dollar), or geopolitical shifts (the rise of a robust labor and manufacturing sector in Asia Pacific). And, of course the largest force against streaks is the age-old tension between fear and greed, or in investor parlance risk and return.
Consider the following true statement:
Nearly three-fourths of investment market quarterly returns deviate from the average – either to the upside or the downside.
Seventy-five percent! That math is actually very similar to baseball statistics. There is no such thing as a one-third of a hit. However, a great player might get a hit one-third of the time. In other words, one at bat, or one game, or one month, or even one season will deviate substantially from the long-term average. How does a good manager deal with that? They have to make a decision of who to put at the plate. That decision may be influenced by recent streaks, but most good managers lean on a longer arc to know that the best chance of a hit comes from the hitter who has exhibited the best long-term track record of hitting.
Back from baseball to investments and the economy. Remember that the investment markets are really composed of lots of businesses (or lending in the case of the bond market). The businesses are run by a cacophony of people, resources, narratives and technologies, all with the purpose of making products and services that other people will want. The demand for those products and services are driven by lots of humans doing human things – growing crops, cooking dinner, driving their kids to events – needing cars, fuel, groceries and high-priced sports camps to support their lives. Will that dynamic change in such a way that may cause the long-term streak to end? I doubt it.
In the world of investing, we choose to own the businesses that develop and deliver such products and services. Or, in the case of the bond markets, we lend out money to various entities (whether businesses or governments or schools), who pay us back with some interest. Investors have expectations for investment returns. When optimism (sometimes known as “greed”) rules the day, expectations are high and prices get bid up through buying. When pessimism (or “worry”) is the predominant concern, prices slide downwards as selling increases, or demand diminishes.
Markets help maintain a healthy tension between optimism and pessimism, or greed and fear, that is exhibited every day through trading action in the markets. Fascinating! When the market has been on a tear, as it has been over the last few years, it is reasonable to state that greed (or optimism) is the sentiment of the day, and the chance of worse performance is the near-term is higher. As Warren Buffet has said, “In the short-term the market is a voting machine, in the long-term it is a weighing machine.”
I have many concerns about the state of the stock and bond markets. I always do. However, when I address the question of “what do I expect moving forward?” I must lean on the long arc of history. The streak will end sometime. There will be a bad streak in the future. But choosing “when” is a gamble. In baseball, there certainly are teams and players who have good long-term track records AND who have experienced both streaks of glory and streaks of awfulness. When choosing who to put to bat, a good manager usually turns to their players with the best long-term track record, streaks be damned. For long-term money, not needed in the next 0 to 5 years, that hitter is the stock and bond markets, here in the US and around the world.
Our investment philosophy at Trail Financial Planning is to follow the long-term trends, while keeping an eye on streaks and the near-term. The way this plays out in investment portfolios is through our three legged strategy of portfolio construction:
- What levels of return and risk do you need to live your best life (this is called “financial planning.”)
- Any money that you need in the near term, should be invested in a less risky way. In times like today, where the market has been on a hot streak, we extend definition of near term from the next five years to the next ten years.
- What level of return and risk can you live with and sleep well at night?
Notice that we do pay attention to the state of the market, driven by the person, their goals, their life stage, and their emotional temperament. Those are elements we can understand, predict and build strategy around.
Last quarter I highlighted a near-term risk for those whose need for money is within the next 5-10 years. That risk is called the “Sequence or Return Risk.” I am going to post that information again below as the risk has only heightened in the last quarter. For clients in this phase of life, we are actively structuring their investments to protect against sequence of return risk.
Sequence of Return Risk for those in or near Retirement
While the markets have done well, we should always be prepared for bad results. People in their “accumulation days” (i.e. working and saving) generally have time to absorb and recover from downturns. Those who are in distribution (i.e. in or near retirement) may not. There is a specific risk called the “Sequence of Return Risk” that we are evaluating for all of our clients who are near or in distribution. In essence, the Sequence of Return risk addresses the risk of poor market performance occurring early in a distribution phase. What could happen is that the market goes into a poor performance phase at the same time that the person withdraws money, leading to a lower portfolio balance. Under some conditions, this could lead to a person running out of money much sooner than under “normal” conditions. The following 3-minute video illustrates one such scenario:
The simulation illustrated is a very generalized model meant only to illustrate a concept rather than to produce a forecast for the fictitious client’s future. It should be pointed out that this is a risk discussion, in other words we are talking about less likely outcomes, but where the impact could be large. The magnitude of this risk is very client-specific, and we would encourage you to talk to a financial professional if you are wondering whether it is a risk you should take action to mitigate.
Disclosures and end notes
Information contained within is generalized information about investing and the investment markets. It should not be considered investment advice, personalized or otherwise. Past investment performance is not a guarantee of future investment performance. Investing in markets comes with an inherent risk of losing money.
