We saw lots of disparate movement in financial markets during the first half of 2018. After the January jump, the last five months saw returns of +1 for the NASDAQ, -4% for the S&P 500 and -7% for the DJIA.
The first month of the year began with a 6.7 %+ surge. U.S. stock prices then followed with a swift 10% correction. On Jan. 26, the S&P 500 peaked at 2872.87, with the low of 2533 on Feb. 9.
Year to date, the SPX closed at 2726, up +1.7%, while the DJIA closed down 1.8%. Small caps led the positive parade along with Energy and Technology. Nasdaq made all-time highs on June 20th. Oil prices surged with WTI closing at $74.1/ bbl. The U.S. is now the leading world producer and has become an exporter of energy as well. Consumer Staples, Financials, Telecom and Transports were all down in the first half. Emerging markets dropped 6.6% and EFA, which represents developed non-U.S. markets, dropped 2.4%.
AGG, the Aggregate iShares U.S. Bond index was down 1.66% along with the 20-year plus U.S. Treasury Bond ETF-TLT -2.98%.
The 10-year Treasury note closed with a 2.84% yield. The difference in yield between the 2-year and 10-year Treasury notes has narrowed to 31 basis points as the Fed pushes up short term rates. By year end we may see a flat yield curve unless long dated bond yields increase or the Fed slows its rate rises.
The most powerful bull market theme has been growth in a slow growth world.
Recent tax cuts pushed U.S. profits higher and some economists see 3% + GDP growth for the remainder of the year. Profits will rise about 20% quarter over quarter during the balance of 2018 and should continue to rise in 2019. Share buybacks were $433.6 billion in Q1 doubling the previous record of $242.1 billion. At the same time investors sold $23.7 billion of stock market funds in June, a new record.
Despite gruff trade talk from Washington, economic policies have been very good for corporate profits and the unemployment reached 50-year lows at 3.8% in May with little inflationary impact.
A tug of war in financial markets continues with fears of a trade war combined with tighter Fed policy and looming Congressional elections seen as possible negatives. Positives include higher profits, lower P/E ratios plus higher capital spending. Global growth depends on trading partners negotiating rather than imposing unilateral tariffs. The ultimate goal of this confrontation is to lower all tariffs, not precipitate a trade war.
A tariff is simply a tax on goods coming from another country. Tariffs cause higher prices for consumers and therefore slower demand for affected products. While we wait to see how this chess match unfolds stock markets stall or worse yet, decline. This concern has brought global net equity outflows to $20.2 billion last quarter, the worst since Q3 2016.
If this issue is resolved in a positive way the U.S. and global economies will improve and fears of an impending recession will fade. If not, slowing trade will hamper growth, profits will peak and markets will likely head lower.
Ed Yardeni, a well know market maven recently stated "this bull market will last as long as the economy expands." Recession is not yet in the forecast for the next 18 months. We have been in economic expansion since 2009, the second longest on record in the U.S. Markets however do not die of old age, we will be alert for changes in vital signs as facts on the ground begin to change.
Happy July 4th & Happy Birthday America!
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