First Half of 2019 - Review
At the end of June, the S&P 500 index stood at 2941.76, +25% from 2346 low 0n December 26, 2018 and just below the October 2018 high of 2944. The Q4-18, 20% decline is a distant memory.
The broader Russell 2000 index still remains 10% below its 1742 high made on August 31, 2018.
Yields on the 10-year U.S. Treasury dropped to 2% on June 30th, well below the nine-year high 3.24% on October 5, 2018.
U.S. GDP is slowing from the revised 3.1% Q1 level but not dramatically. Fear of a global recession permeates government bond markets, in the developed world, with negative rates on $12 Trillion of debt in Germany, Switzerland, Holland, France and Japan.
S&P 500 earnings have increased from $60.80 in 2009 to an estimate of $167 in 2019, according to Yardeni Associates. At 2973 the index sells for 17.8 times forward earnings, with a 5.6% earnings yield. This compares well to the U.S. Treasury "risk free rates" of 1.98% on 10-year notes.
Unemployment is at 3.8%, a 50 year low. Inflation is below 2%.
Mexico and Canada, our largest trading partners, have agreed on a new trade deal. China, Europe and Japan are likely to follow. The U.S. leads the world in technology, food production, energy production and total wealth with merely 5% of the global population.
We are mindful that the economy is in the 11th year of recovery. Valuations depend on earnings and interest rates, and both support current stock prices.
Our markets have outperformed foreign markets, despite values being cheaper abroad. Growth stocks have outperformed value stocks over this cycle. We acknowledge that we trade near the top end of the 10-year valuation range, however stocks remain cheap relative to bonds.
With the SPX up 17.3%, and the DJIA up 14% through June 30th, some believe the market may falter, as earnings comparisons remain difficult for the next few quarters.
The Fed is more accommodative in 2019 versus last year. The market anticipates 2 rate cuts by year-end, starting in July. Some call this market “Goldilocks,” while others the "Twilight Zone,” but it keeps on keeping on no matter what you call it.
Happy July 4th and God Bless America!
Disclaimer: These stock market observations are confidential and proprietary. They are for informational purposes only and are not intended to be used, and may not be used, as investment, legal, accounting, tax, or other advice. No express or implied representation or warranty is being made with respect to their accuracy or completeness. No obligation exists to inform the recipient when the information herein is no longer current or accurate. These observations do not constitute an offer to sell or a solicitation of an offer to buy any securities or interests in any investment vehicles managed by CFA or an associated person or entity, or to provide investment advisory services.
