2019 Q2 Market Review: IFC

Mary Brunson and Murray Coleman
Thursday, August 8, 2019

After logging strong returns in the opening three months of 2019, global equity markets slowed in the second quarter. Still, major indexes across the world ended Q2 in positive territory.

The U.S. blue chip S&P 500 returned 4.30% in the second quarter, cooling off from a white-hot 13.53% gain in the previous quarter. That was similar to the Investing for Catholics (IFC) U.S. Social Core Equity Index, which gained 3.98% in Q2 as compared to its 13.99% jump in the opening quarter.

Major financial news in the second quarter highlighted data showing dampened economic growth in key markets across the world, a breakdown in U.S.-China trade talks, growth in the U.S. federal budget deficit and a drop in growth of domestic housing prices.

Even so, the S&P 500 produced its best first-half performance in 22 years by gaining 18.51%, in-part due to rising expectations of an interest-rate cut by the Federal Reserve.

Faith-based investors trying to glean any clues to longer-term market price trends from such blips might want to remember an important lesson of research by University of Chicago professor Eugene Fama. 

As Fama, the 2013 Nobel Laureate, put it years ago (see video below), "prices reflect all available information so that ... it is basically impossible to beat the market ... because investors are always paying fair prices."

He added: "So the task of investors is simplified -- they just have to decide how much risk they want to take to get more or less expected return. Investors don't need to worry about picking stocks or timing the market because they can operate under a presumption that stocks will be fairly priced."

Of course, IFC keeps its eye on market ripples. At the same time, we keep in-mind the importance of taking a long-term and evidence-based investment approach to markets.

Along these lines, we'd urge you to re-examine Index Fund Advisors Founder Mark Hebner's work on developing a model to help create a framework for explaining to investors how market pricing dynamics work in everyday application. (Investing for Catholics is a wholly owned division of IFA, which is a fee-only independent financial advisor registered with the U.S. Securities and Exchange Commission.) 

IFC Indexes

The plight of U.S. stocks in Q2 serve as another example of how fluid and unpredictable market conditions are over shorter timeframes.

After hyperactive growth in the opening three months of 2019, all IFC domestic stock indexes kept gaining ground in the second quarter. While not as robust as earlier in the year, returns in Q2 finished higher.

Gains in the quarter ranged from 3.98% for the IFC US Social Core Equity Index to 1.18% for its sister Emerging Markets Social Core benchmark. IFC's Social Fixed Income Index produced a 3.52% return and IFC's international core social benchmark rose by 2.37%. Meanwhile, global real estate stocks as measured by IFC's index increased in Q2 by 1.82%.

IFC Risk-Based Index Portfolios

The returns of the IFC Index Portfolios are shown below net of the maximum annual 0.90% advisory fee through June 30, 2019. Reflecting positive performances across indexes in both equity and fixed-income categories, each continued to post relatively solid year-to-date results by the end of the second quarter.  

The benefits of diversification across stock and bond portfolios allocated in a faith-based manner proved particularly valuable in Q2. The all-equity IFC Risk-Based Index Portfolio 100 produced a return of nearly 3%, which might appear fairly solid amid a slower short-term global growth backdrop. 

But mixing in some fixed-income into the investment picture led to even better results in the quarter. Just adding 20% in bonds helped the IFC Risk-Based Index Portfolio 80, which is still heavily allocated to stocks, to return 3.01%. And going with 80% bonds in IFC Risk-Based Index Portfolio 20 gained 3.22% in the most recently completed three-month period.

Then again, consider how short of a timeframe this really proved. The highly tilted bond allocation in IFC's Portfolio 20 did comparatively well in Q2, but notice how such an overweighting impacted returns in the previous quarter as well as year-to-date (through quarter's end). 

That's why our portfolios include the term "risk-based." As Harry Markowitz observed as part of his pioneering research in developing the Modern Portfolio Theory, investors need to balance their financial expectations with how much portfolio risk is really necessary to reach each person's unique longer-term financial goals. 

Investing for Catholics' process for evaluation, selection and recommendation of investment managers is shaped by our extensive research into the areas of historical long-term investment success, with consideration to the tenets of Modern Portfolio Theory and the Multi-Factor Model developed by professor Fama and another leading academic, Kenneth French.

The findings that make up this important compilation of research reveal that returns are not the result of price speculation, but rather returns arise from a portfolio's specific exposure to defined risk factors.

This sound reasoning provides support for the primary goal to capture market returns at minimal expense. Such a goal can be accomplished by abandoning efforts to beat the market and buy the market through risk-appropriate doses of index funds that are passively managed, style pure, low cost and are screened to adhere to socially responsible guidelines.

Each quarter, IFC monitors the funds we recommend for clients and as part of that process, we've developed a rating system. Below is a link to our Performance Monitoring Report for client portfolios: IFC Second Quarter 2019 IFC Client Performance Monitoring Report.

Our parent company, Index Fund Advisors, has created an Investing Kit that includes a copy of "Index Funds: The 12-Step Recovery Program for Active Investors" book and documentary film based on the book, as well as the Galton Board, Stock Market Edition, which simulates the distribution of 600 monthly returns right before your very eyes.

This is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product or service. There is no guarantee investment strategies will be successful.  Investing involves risks, including possible loss of principal. IFA Index Portfolios are recommended based on time horizon and risk tolerance. Take the IFA Risk Capacity Survey (www.ifa.com/survey) to determine which portfolio captures the right mix of stock and bond funds best suited to you.  For more information about Index Funds Advisors, Inc, please review our brochure at https://www.adviserinfo.sec.gov/