Halftime Market Report

July 23, 2018

It's July 16th and we're back after taking last Monday off for some recovery time post-Independence Day week.  I think it's time for a good, old-fashioned halftime report on what's going on in the markets and economy as we move into the second half of 2018.

No doubt, the stock market has taken a much different course in the first half of 2018 (period ending June 30th) than the incredibly easy and benign year we had in 2017, which is a complicated way of saying things just haven't gone straight up the entire year.

Growth stocks have outpaced value stocks, and smaller companies have fared better than the bigger companies.  Bonds are mixed but haven't been a safe haven with the Aggregate Bond Index down 1.62% on the year - a product of rising interest rates.  The S&P 500 Index is up 4.78% year-to-date as of last Friday, with half of the ten sectors in negative territory and the other half in positive territory.

Here's a great chart of the performance of different asset classes over different time frames as of June 30th, 2018.  Year-to-date is the second column from the left.

We have been witness to one of the truly great bull markets since the financial crisis ended.  Peak to trough, the S&P 500 Price Index is up 302% (3-9-2009 to 6-30-2018) and investing in an S&P 500 index fund has delivered compounded returns of approximately 14.56% per year during that time - $10,000 invested into the Vanguard 500 Index Fund in January of 2009 would be worth $36,389 (source: Portfolio Visualizer).

So what can we learn from that? Well, every market is different, but speculating on the prices of assets is as old as time itself. The most important factor in stock and bond prices is human behavior, and it's also the one that is the most difficult to understand and impossible to prepare for.

For good measure, repeat after me: We don't know what the market will do tomorrow, the rest of 2018, or next year. Because of that, we need to diversify our holdings and prepare for any and all scenarios.

Risk tolerance is very hard to define for investors because our ability to "tolerate" risk changes depending on the environment we're in - we are much more likely to say we're aggressive when the stock market is doing well and that we're conservative when it's doing poorly.

If you want to give yourself and your investment portfolio a quick risk assessment, click here.

The Economy

It is often said that the economy is not the stock market, and the stock market is not the economy.  They are linked, obviously, but are still very different.

Despite the added volatility in the stock and bond markets this year, our economy is doing very well.  Here is a great chart from Deutsche Bank's Chief International Economist, Torsten Slok:

"Let’s spend less time looking at the yield curve and more time looking at the economic data. Everyone who talks about late cycle and a recession coming soon should take a look at this chart. The US economy is producing the highest number of jobs in the manufacturing sector since 1998. This confirms the overarching investment theme across all asset classes today: The risks of overheating and overshooting inflation are much higher than the risks of a recession. In fact, this is the entire reason the Fed is so keen on raising rates a lot more from current levels." ~Torsten Slok


And, finally, no good halftime report would be complete without talking about the housing sector and the affordability of real estate.

The great Bill McBride of Calculated Risk took a look at the National Average Wage Index from Social Security and compared it to the Case-Shiller National Index on home prices.  

There is no exact way to figure out how affordable real estate is for a variety of reasons, and McBride admits that this is a crude way to extract that information - but it's the best we can do to paint a picture and the data is very interesting.

"As of 2017, house prices were somewhat above the median historical ratio - but far below the bubble peak. Prices have increased further in 2018, but house prices relative to incomes are still way below the 2006 peak (but slightly above the 1989 peak)." ~Bill McBride

Be great this week, and be kind to someone who needs it most.  Also, please feel free to let me know if you have any thoughts or concerns on the market of your own.