Q2 – 2018: Brandon’s Quarterly Market Commentary
Markets improved in Q2 and finished modestly higher by most measures. This volatility in 2018 has ticked higher and we’ve heard rumblings such as “trade war”, “rising interest rates”, and “North Korea nuclear situation”. Since we appear to be in the alter stages of a long bull market, it’s normal to wonder how and when the bull market can end. I mean, look at the 10-year Dow Jones Industrial Average chart that I posted above…it’s been one heck of a ride! Looking at Q2 of 2018, we saw small cap stocks leading the way and within that group, growth stocks outperformed value stocks. As far as sectors, performance was enhanced due to strength in technology, healthcare, and financials. The 10-year bond closed at 2.85%, which was slightly higher over the quarter. The price of oil has been on a roll as well, crude oil closed at $74.15 (up over $10 in 2018). That said, here’s how some of the major metrics fared in Q2:
|S&P 500 Large Cap Index||2.93%||1.67%|
|S&P Small Cap 600 Index||8.41%||8.66%|
|S&P Developed International Index||0.97%||-.60%|
|S&P U.S. Agg Bond Index (total return)||-.12%||-1.39%|
|S&P Municipal Bond Index (total return)||0.91%||-.02%|
|Dow Jones All REIT Index||7.33%||-.80%|
|Dow Jones Commodity Index (spot return)||1.56%||2.49%|
Source: Dow Jones, data as/of 6-29-2018 (doesn’t include dividends unless noted)
Many economists were optimistic with recent data that suggest the market is still fairly healthy. Take the employment situation as an example. The unemployment rate is sub 4% (it was 4.3% a year ago) and average hourly earnings has increased. With more people working and also making more money, that is considered a good sign. Here’s the formula: more people working + higher wages = greater spending. More spending helps boost the economy.
Another determinant of the near term economy is the housing market. I don’t read in to the numbers nor attempt to explain what they all mean, but in general a healthy amount of new houses are being built and new permits are being applied for. When people buy new houses, they need to furnish with big ticket items (furniture, appliances) and improve them…all good for the economy.
I think the one story that will be a major topic of discussion in the second part of the year is the tariffs that President Trump has initiated. There is still much uncertainty about how it will play out, and it has resulted in some volatility in recent months. Most recently, Trump has backed off somewhat from his hard stance on China-based tariffs. In turn, fears of an all out “trade war” have lessened and I think will ultimately not become an issue. But you never know – that will be something to watch.
Other measures we look at are interest rates and earnings. Interest rates continue to rise, and are expected to continue…but are still relatively low compared to historical averages. Those who needs loans are still able to find them, and they still find the rates attractive. I don’t think the current pace of interest rate increases is going to cause any kind of fiscal crisis. Corporate earnings are solid as well, and the average (forward) P/E ratio is around 17…which is close to historical averages. Back in the dot com era, that number exceeded 26 before the bubble burst. We aren’t close to those levels and most likely won’t get near them, but these measures indicate the markets are fairly priced.
I am not in the business of predicting what the market will do in the short term but for the most part, amidst a lot of negative headlines in the news, I like what I am seeing. Of course I would love to see our federal debt at lower levels, no tariffs (or lower tariffs), and less talk of a potential nuclear war…but all-in-all I remain optimistic and positive.
A final comment: the mid-year point is a good time to reflect not only where the markets are, but how your portfolio is allocated. Often times we will rebalance once a certain sector gets to be more than 5% out of the target range. With small caps doing well as of late, we are looking to trim some of those positions to keep them in line with the target allocation we have agreed upon. If we are tracking your net worth, it’s also a good time to record where things stand. I also encourage people to review their tax situation (do you need to increase or decrease your withholding for the year) and similar with their retirement plan (i.e. are you going to max out your 401k by year end?). Let me know if you need help reviewing any of these topics more in depth.
Disclaimer: This information contains forward-looking statements about various economic trends and strategies. You are cautioned that such forward-looking statements are subject to significant business, economic and competitive uncertainties and actual results could be materially different. There are no guarantees associated with any forecast and the opinions stated here are subject to change at any time and are the opinion of the advisor. Data comes from the following sources: Census Bureau, Bureau of Labor Statistics, Bureau of Economic Analysis, the Federal Reserve Board, and Haver Analytics. Data is taken from sources generally believed to be reliable but no guarantee is given to its accuracy.