Market Update: Second Quarter 2018
After a rowdy first three months, the second quarter brought a little more calm to the markets. While US equities posted negative returns in the first quarter, they recovered in the second quarter to close out the first half of the year in positive territory.
The S&P 500 index, representing large US stocks, gained 2.9% during the second quarter, culminating in a 1.7% gain so far in 2018. Investors in smaller companies, as measured by the Russell 2000 Small cap index, did even better, posting a 7.8% gain over the second three months of the year, and now stand up 7.7% at the half-year mark.
In comparison, the rest of the world has not fared as well. The broad-based MSCI EAFE index of companies in developed foreign economies lost 2.3% this quarter, and is now down 4.5% for the year. Emerging market stocks, as represented by the MSCI EAFE EM index, after being in positive territory for the first quarter, turned negative in the second quarter, down 8.7%, for a loss of 7.7% for the year. Emerging market stocks were the best performing equity asset class last year but trade war rhetoric has put pressure on stock prices this year.
Looking over the other investment categories, real estate, as measured by the Wilshire U.S. REIT index, gained 9.7% during the year’s second quarter, and is just eking out a 1.5% gain for the year. Commodities, as measured by the Bloomberg Commodity Index, gained 0.40% during the second quarter, erasing the first quarter loss, finishing flat through the first half of the year.
In the bond markets, US interest rates continued to rise, but at a slower rate while still remaining low by historical standards. Higher yields, of course, mean a decline in value for those holding bonds. For the second quarter, the Barclays Aggregate Bond Index was down 0.2%, and is now down 1.7% since January 1.
No one can accurately predict how the second half of the year will play out. The underlying fundamentals remain generally positive – corporate profits are expected to come in strong, unemployment is at an 18-year low, and inflation remains in check. However, increasing trade tensions between the US and its trading partners in China, Canada, and the European Union, could tap the breaks on economic growth and impact markets around the world.
We hope you’ll avoid reacting to recent news. At the same time, we understand how hard that can be. No matter how often we’re faced with uncertainty or how well we think we’ve prepared for it, new threats and opportunities have real ramifications in our lives; it’s natural to wonder whether “this time” they should also influence our investment decisions.
The decades and volumes of robust evidence guiding our portfolio management approach still suggests otherwise. To best pursue your personal goals, we must continue to consider the latest news within the greater context of how global capital markets have delivered their eventual returns.
Our rational selves understand this. Though, as Georgetown University finance professor James Angel observed in a recent Wall Street Journal article, “One of the open secrets of the financial-services world is that we’re also in the entertainment and gaming industry.” We see examples of this with the various CNBC segments and shows like Mad Money with the ever flamboyant Jim Cramer. Fortunately for you, that’s not the game we want to play.
Building and maintaining a globally diversified portfolio is not usually fun or entertaining. Mostly, it is comprised of sticking to a well-crafted investment portfolio, year in, year out.
Here’s a fun stat to remember next time you’re tempted to bet against the proverbial house by guessing where the market is headed next: “Since 1928, the [U.S.] stock market has risen on 54% of days, 58% of months and 73% of years.”
This comes from the same WSJ article, along with this important observation: “The distinction between an investment and a gamble lies in the odds of success.”
Our goal is to keep those investment odds ever in your favor. It may not be as entertaining, nor is success guaranteed, but all evidence suggests you’re best off investing in the house and its expected favorable outcomes, rather than placing concentrated bets on every hand played.
Going forward, we will continue to monitor the markets and the securities in your portfolios. Whatever market conditions we are faced with we will continue to maintain our disciplined approach to managing your portfolio.
As always, please be in touch any time we can help you explore current market returns as they relate to your financial goals, or with anything else that may be on your mind.