Halftime 2018

As the first half of 2018 comes to a close I’d like to recap performance (or lack thereof) and give a few thoughts for the second half.

Markets has been interesting thus far.  The S&P500 began the year by rallying 7% to start the year then promptly falling 11% over the next 2 weeks.  Since then it’s been a maddening back and forth with 5% rallies and 5% drops.  At the moment, The S&P500 is up on the year, but only slightly (+1.7% as of 6/28). 

Bond prices have struggled with interest rate hikes.  The average bond holder is down slightly on the year (-1.5%)*, as are international stocks (-4.5%)**, Emerging Market Stocks (-8.5%)***, and gold (-3.4%)****.

What does the second half of the year hold for investors?  I’m afraid it looks like more of the same maddening swings.  We maintain the belief that we are in the late innings of the bull market which may continue longer than it logically should.  In full disclosure, I felt like we were in the late innings in 2016 as well, but tax reform provided a nice lift that we didn’t expect.  Nevertheless, we are likely much closer to the end of the bull market than the beginning.  

The case for the bull market (gains) to continue:

Earnings must continue to surprise on the up-side and investors have to maintain confidence that a recession is years in the future.  2016 and 2017 saw investors bid prices higher in hopes of increased earnings from the tax-reform.  We are now starting to see the earnings come through – and thus far they haven’t disappointed, but investors are now in search of the next catalyst.

Case for a bear market (losses) to takeover:

Trade war concerns still loom large and could escalate.  Increased tariffs are likely to weigh on stocks.  Futhermore, interest-rate hikes are increasing yields on ‘safe money’ investments like CDs and saving accounts, which is likely to remove some incentive for investors to chase returns in the stock market.  In the end, higher rates will likely remove some of the desire for investors to continue to pay premium prices on stocks.

On a different note, most of the performance in the overall market over the last 2 years has been driven by the technology sector.  Valuations look very rich for many names and should come back to earth at some point which could drive markets lower.

Of course, the wild card risks such as terrorism, political upheaval, and Twitter rants remain, but generally don’t cause long-term disruption to markets.  From a technical standpoint it’s concerning that the market bounces lower each time it gets back near the January highpoint, which leads us to believe that the January high may stick as the high point for the year.  Time will tell.  At any rate, we continue to scale back on risk and exercise caution.

*Bloomberg Barclays US Aggregate Bond TR USD

** MSCI ACWI Ex USA

***MSCI Emerging Markets

****SPDR® Gold Shares