Record Second Quarter but Several Challenges for the Market Ahead
We have to go back to 1997 to find a time when the financial markets(S&P 500) provided similar performance as the first half of 2019, delivering gains not witnessed in over 22 years soaring 17.3%. The S&P 500 gained 6.9% in June, its best June since 1955. All 11 of the S&P 500 sectors rose in the first half of the year, with tech rising more than 26% to lead the gains. Energy was the market’s laggard in the first half, rising just 7.1%.The Dow Jones Industrial Average(DOW)rose 14%, its best first half since 1999. Microsoft and Walt Disney Co. were among the biggest gainers in the DOW. Microsoft is the best performer in the DOW in 2019, up 32% and its jump contributed 8% of the total gain in the S&P 500 during the first half. Small stocks as measured by the Russell 2000 index fared less well, moving up just 1.7% during the second quarter. So why all the hoopla and demand for US stocks?
After a very difficult November and December 2018 period where the S&P 500 plunged more than 19%, its worst November and December decline since 1931, stocks regained their mojo in late December when Fed Chairman, Jerome Powell admitted the Federal Reserve may have raised short-term interest rates too far and too fast with their four rate hikes in 2018. In addition, President Trump communicated the US and China had restarted their stalled trade negotiations. While this helped create a recovery in the stock market, it didn’t take much to cause the market concern. In May, China walked away from the trade negotiations and the financial markets quickly performed an about face. In June, the markets again regained their mojo on hopes that the Federal Reserve would come to the rescue of a slowing US economy. We saw a slowdown in both the manufacturing sector and the service sector as measured by the Institute of Supply in June and both durable good orders and consumer confidence came in below expectations. Also, bond yields dropped over 50 basis points during the second quarter as the bond market point to the possibility of a longer or prolonged economic down turn. Wall Street watches the difference between short and long term interest rates to see if we get to an inverted yield curve which we have. An inverted yield curve has predicted 8 of the last 9 recessions. Yet again stocks have rallied. The investor demand for stocks likely comes from a belief that a US/China trade deal will get done, and the Federal Reserve likely will lower US interest rates.
We think it is important to rebalance portfolios when markets reach extreme levels like we have today. While a trade deal with China will likely lead to a market rally, there is no guarantee that a trade deal gets done. Let’s be honest, China needs a deal and our President is anxious to make one, but that doesn’t mean an agreement can be hammered out.
The current economy by any metric is doing well, unemployment is at an 18 year historic low, factory orders are up, exports are surging, and the gross domestic product has broken out of what we became to expect of the 2% new normal doubling to 4.1%!
Summer is a great season. Farmers’ markets, fairs, community celebrations and BBQ’s all provide ample opportunity for people to get out and enjoy great weather and good friends. It’s also a great time for a check-up on your personal financial priorities. Around the beginning of the year, and with the best intentions, a lot of people set goals for themselves. Common financial goals are to save more, spend less, ask for a raise, start a business, and myriad other objectives. The problem with this kind of goal setting is that it often gets lost in the shuffle of daily life. Things happen throughout the year robbing us of attention on what we thought were our priorities. That’s okay, but it also makes summertime a great opportunity to give your goals a second look. Maybe some of them aren’t as important to you. Maybe some really do need your attention.
Despite being 10 years into an economic expansion in the US, a stunning 67% of employees’ report that they are stressed dealing with their financial situation. The survey, by big-four audit firm PricewaterhouseCoopers (PwC), shows 59% of ALL employees report financial challenges being the leading cause of their stress.
A little thought goes a long way. When it comes to financial stress, having clearly defined objectives and strategies for working toward those goals is important. Ambiguous goal-setting is a futile exercise, and often counter-productive to reaching desired targets. Don’t set immeasurable goals – “I am going to save more and spend less”. The problem here is to know the definition of “more” and “less.” A better way of defining this goal might be: “I am going to save an additional 3% of my take-home pay, and spend 10% less in X, Y and Z areas for the next 12 months.” It goes without saying that goals should be written down. An oft-quoted, but misattributed phrase comes to mind: “Goals that aren’t written down are merely dreams.” Write down your goals.
It is also important to recalibrate goals. A mid-year review of goals is a great thing to do in the summer. Find a nice afternoon, grab a cool beverage, and take a look at your goals. Try to remove obscurity. Get specific. Set guidelines so you know when a goal has been achieved, when it has not been achieved, and what else must be done to achieve it. Going back to the previous example, what if it were clarified just a little bit more? “I am going to raise my 401(k) contributions by 2% and I am going to put 2% of my take home pay into a savings account starting in August.” That is specific. That is measurable.
Spending less is harder in general. Goals set in ranges are very helpful, psychologically, to improve follow-through. Instead of saying “I’m only going to spend $250 on eating out.” Something like, “I will spend between $200 and $300 eating out each month,” can improve compliance and provide flexibility at the same time.
If you don’t have a written set of goals, summer is a great time to write them down. Goals set at the mid-way point in the year might be more effective, too. At the beginning of the year, you set goals for the coming 12 months. The “year” sounds like you have a lot of time to achieve your goals, so by setting them in July or August, you’re already near the deadline. When your goals are written down, clearly defined and measurable, they become more attainable than otherwise. If they’re not written down, you’re basically saying “It would be nice…” instead of “I’ve decided that I need to…”This mindset will encourage action to be taken. And action is what will lead to results. Written goals are no good unless they’re acted upon. So do yourself a favor. Invest a small amount of time to design your financial life, intentionally.
Recap and outlook
There are a lot of moving parts and things that can go wrong in the second half of the year, but at this point in the economic cycle, the potential positives outweigh the negatives. We feel we are still 12-24 months or longer from recession given the strength of the consumer, low interest rates and inflation, an accommodative Federal Reserve, and a global backdrop that is improving. Second quarter corporate earnings are being released the next few weeks which may set the stage for a year-end rally if the lowered expectations are beat. Many companies have been guiding down given the trade and interest rate uncertainty and expectations are low for Q2 and Q3 earnings. A strong employment market and business friendly administration should also keep the consumer and small business environment supportive to the economic expansion.
This will become more of a factor as we near year end 2019, but the upcoming 2020 election will also begin to move the market as we have seen in the healthcare sector recently. We will continue to monitor for opportunities as the market becomes over-sold and over-bought on investor emotions and stay focused on the fundamentals of the market for client portfolios.
We appreciate all of our client relationships and wish you all a great rest of the summer. We look forward to touching base with you as the second half of the year unfolds.
Until next quarter….
https://www.instituteforsupplymanagement.org/ismreport/mfgrob.cfm?SSO=1 – ISM Manufacturing
https://www.cnbc.com/2019/07/05/jobs-report-june-2019.html Strong employment report
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