May Market Update
In our January 2018 commentary, we stated that, "the S&P 500 is well above its historical average, but high valuations do not mean bear markets." We further stated, "while these (years when the market is above its historical average) were not the market's highest returning years, compared to the 10-year Treasury, currently at 2.48%, it still looks attractive." Reviewing the year to date numbers, as of May 31, 2018 the S&P 500 was up 2.0% whereas the Barclay's Aggregate Bond Index was down 1.7%.
We share these comments to bring the focus back to the market's fundamentals rather than the headlines in the media. We've also shared in our comments earlier this year that the market has seen significant inflows and outflows for 2018, most of which appear to be poorly timed by those who are attempting to time the market. We continue to believe that trying to time the market is a dangerous game.
So what do the market's fundamentals tell us now? GDP continues to increase (a positive for the economy and markets). The Federal Reserve has been able to raise interest rates without stalling out the economy's growth (an indicator that the economy - and market - are still healthy). The sale of new one-family homes has continued its year-over-year growth (a positive for the economy and markets). Private construction expenditures continue to increase (a positive for the economy). Industrial production continues to increase, which is good for both wages and the economy (as well as the stock market). The unemployment rate, disposable income, and consumer confidence also indicate the economy (and stock market) have room to grow. While we could add many more items to the list, we will refrain and simply share that there are multiple indicators supporting continued economic and stock market growth.
We also want to comment on the media's reporting of the news. They have been diligent at informing us of the possibility of trade wars and supply chain disruptions. They've also been diligent about informing us of political events (and the damage they believe those may cause). Where we believe they have been more remiss is reporting the positive news. Some examples would include North Korea. We've seen on and off again posturing by Trump and the North Koreans (as well as multiple other global leaders), and the projections of all the negative outcomes this could produce. What the media has not shared so much of is that the diplomatic resolutions put in place with North Korea do appear to be working. We have not had to engage in military action with North Korea. Significant sanctions were levied against North Korea, and we see that the US and North Korea are still on speaking terms. Have the issues been resolved yet? No, but since the two parties are still speaking, and the direction of their discussion moves closer to the denuclearization of North Korea, we believe some progress appears to have been made.
Then there is China. We think ZTE (the Chinese smart phone manufacturer) is a good example to review. They violated US sanctions by selling phones and equipment where they should not have been sold. Trump could have stayed the course and bankrupted the company putting 75,000 Chinese workers out of work, but he didn't. The resolution was that they pay a $1 billion dollar fine and honor the sanctions going forward, which they have agreed to do. Now we are not saying it's pleasant to watch Trump's tactics, nor are proposing they will all be effective. What we are stating (objectively) is the media has focused on the turmoil and possible risks, meanwhile they seem to generally dismiss the wins and positive outcomes.
As always, we will continue to monitor the economy's fundamentals and share our perspective on what we believe investors should expect based on that data. We continue to believe equity will outperform fixed income, and that while equity returns will be lower than they have been in the last few years, they will still be among the best performing investments in most investors' portfolios this year.
If you'd like to have a more detailed, personal portfolio review, please let us know.
Categories: Monthly Market Commentary