As I noted in the prior quarter, this has been a roller coaster year for stock markets and this quarter was certainly on the incline.  It was an exceptional quarter for large stocks and even bonds.  A couple of asset classes lagged as I will present below.  We owe this quarter’s performance to the Federal Reserve’s decision to pause their interest rate increases along with continued good economic fundamentals.  This puts us in a catch-22 situation, if the economy does well, inflation may rear its ugly head and the Federal Reserve may raise rates again.  On the other hand, if the economy slows down too much we could head into a recession.  What we need is a moderate situation where inflation is tame, but the economy continues to grow.  If this occurs, the Federal Reserve could lower rates next year easing the burden on individuals and companies who have borrowed at floating rates.

Here are the recent and cumulative returns of some major market sectors.  As noted in my earlier musings, I prefer to use index funds to measure returns (including dividends and trading costs) rather than the indices themselves.  These are the returns you actually would have received investing in these funds, rather than hypothetical index returns.

Note that large stocks (particularly U.S. stocks) outperformed small and mid cap stocks this quarter.  Perhaps the most surprising return this quarter is that of Real Estate Investment Trusts which continued to trounce the other asset classes.  Remember REITS represent commercial property, hotels, apartments, etc., – not your local personal residence or the condominium market.  You need to be careful not to chase returns using this data.  History has shown that the best performing investment next year is unlikely to have been the one that performed best last year.  REITs have had a good run and many are very high priced at this point.  I would not expect the coming quarters to have any where near these returns, in fact, I think buying opportunities may occur in the future, especially if long term interest rates rise. 

Remember, a diversified portfolio with representation of many asset classes (types of investments) reduces risk and can help you sleep better at night.  Don’t put all of your eggs in one basket (but if you do, watch that basket very closely).