Capital Market Recap
Investors experienced positive returns in virtually every asset class during the first quarter of 2011.  Small U.S. stocks led the way with returns exceeding 8%.  Emerging international markets were in negative territory for most of the quarter but ended in the black.  Large company stocks around the world managed to shrug off the impact of natural disaster and nuclear crisis in Japan, political upheaval in the Middle East, and lots of other bad news, to provide returns in excess of long-term expectations.

Trailing period returns now incorporate two years of recovery since the market bottomed out in the spring of 2009.  Major indices like the S&P 500 remain well below the peak values reached in the fall of 2007 (1320 now versus 1560 then) but well-diversified portfolios have recovered their value thanks to the strength of small company stocks and the receipt of dividends.  The major indices now show positive returns when we look back three, five and ten years, with the exception of international stocks (EAFE) over the three-year period.

The bond market continues to labor under the burden of low current yields and the threat of higher inflation, which could push interest rates up and bond prices down.  In the meantime, bond returns were slightly better than break-even for the quarter, as the asset class continues to perform its role of adding stability to a diversified portfolio.

Walmart vs. Gold – How will investors be rewarded?
In a recent issue of Grant’s Interest Rate Observer I saw a discussion of the inflation hedging attributes of gold, compared to the common stock of Wal-Mart Store, Inc., and some interesting comparisons of how the two investments have performed over the past three decades.

In the summer of 1999 gold was worth about $250 per ounce.  It now trades for more than $1,400 per ounce.  Walmart stock, on the other hand, has traded in a range around $50/share since 1999.  So, it’s easy to see which was preferable to own over the past ten or eleven years.

Why have Walmart investors seen such poor returns?  Has the company been doing that poorly?  The answer – the company has done very well.  In fact, sales have grown at a compounded annual rate of 8% over the period while earnings have grown at a rate of 11% and dividends at a rate of 17%.  Book value per share has grown at a rate of 13%, but the market value has not changed!  The difference – investors were willing to pay 50 times earnings in 1999 but only 12 times earnings today.  So the company has grown and been profitable, and is expected to continue its profitable growth, and yet investors were not rewarded.  The market seems to have concluded that it will now be difficult for the largest retailer in the world to continue growing at the explosive pace it set in the 1990’s, which justified the large multiple for its price relative to earnings.

The collapse of the price/earnings ratio implies a change in the underlying assumptions about Walmart’s growth prospects, while the price of gold tells us something about the market’s fear of inflation.  But what conclusions can we draw about returns over the next ten years?

If markets are rational, we would expect similar risk-adjusted returns from gold and Walmart stock – why were they so different over the past eleven years?  Well, the events of the past 11 years would have been difficult to predict in 1999.  Walmart was growing like a weed, on its way to becoming the largest retailer in a world driven by exploding consumer demand.  Gold, on the other hand, had been worth $850 an ounce in 1980, when inflation in the U.S. reached double digit levels and the value of the dollar was in jeopardy.  From that point gold lost 70% of its value.

If someone told you in 1999 that Walmart’s price would stagnate while the price of gold grew to five times its value, you would not have believed them!  No one could have predicted the series of events about to occur.  The collapse of the technology bubble was followed by America’s war on terror, a real estate bubble, and then the credit crisis that led to the deepest recession since the Great Depression.  Will the next ten years be as unpredictable….probably.


1.  There is no way to predict which company or asset class will blow through market assumptions to provide surprisingly good or bad returns.  The future is unknowable and we will continue to be surprised.

2.  Succumbing to emotion, or placing too much value on what has happened recently, will almost certainly have ill effects on investment outcomes.

3.  Non-earning assets, like commodities and precious metals, will continue to be difficult to value precisely because they are non-earning.  The value of any asset can be defined by the cash it is expected to produce in the future, but the only cash gold can produce is the price some future buyer is willing to pay.

4.  Ten years is simply not a long period of time when looking at history to develop expectations for the future.  It is very unlikely that the next ten years will look anything like the past ten.

As investment advisors our job is to understand what risks are important and help clients navigate through uncertainty.  Sometimes it is necessary to look beyond the past ten years to gain perspective.