Monthly Outlook: June 2018
U.S. stocks continue to mark time in May, stuck in a sideways, range-bound channel. The S&P500 has been stuck at 2,700, give or take 100 points, for the past six months. If the economy is so good, as evidenced by rising corporate earnings and full employment, then why can’t the stock market continue to advance? Could it be that the barrage of tweets (from many people) and the constant cross-talk of tariffs and trade wars is just too confusing? Perhaps CEOs and investors, alike, are unable to commit new capital, frozen with indecision. More on this later, but let’s first review the markets.
U.S. stocks (S&P500) had a decent gain in May, adding 2.4%. But this market remains stuck at about 2,700 these past six months and is presently at 2,705. For the past 100 trading days (which is close to YTD), the S&P500 has closed above 2,700 on 52 days and below 2,700 on 48 days. While it sounds like the market has been dead-on flat and boring for six months, it’s been anything but. It’s been flat overall, but volatile day to day. In 2017, the S&P500 had daily moves of greater than 1% on 8 days, or 3% of the time. Already in 2018, the market has had daily moves of greater than 1% on 33% of the trading days! Clearly, it’s a lot of up, down, and sideways overall. It’s a bit frustrating to us, too, but we know from history that sideways markets don’t last for long. Since the long-term trend for U.S. stocks remains up, we’re staying cautiously invested for now.
International stocks (FTSE All-world ex-USA) were a disappointment in May with a loss of 2.0%. Italian stocks lost 9.8% but others contributed to the softness in international stocks, too. Spain, Germany, France, Mexico, and a few other markets also showed losses. Importantly to us, both European and Emerging Market stock indices tipped over to new downtrends and so we trimmed our positions in them, raised some cash, and moved to a more protective position in these markets.
Bonds gained 0.7% for May but continue to be in long-term downtrends as interest rates continue to rise. The 10-year U.S. interest rate is now at 2.8% and trending higher. The U.S. Federal Reserve continues to indicate its intention to raise the overnight Fed Funds rate another two to five times over the next 18 months. Of course, they always say that their outlook is “data dependent” which is just code for “we don’t really know so you’ll have to wait and see.” But it’s safe to say that the trend for interest rates is up for now, so we remain invested only in short-term investment-grade bonds.
Tweets & Tariffs
Since the financial crisis of 2008, the economy has recovered in many ways and is running at full throttle thanks to unprecedented and massive global central bank stimulus programs. Much of this cheap and easy credit drove up financial asset prices including stocks, bonds, and housing. Today, valuations metrics (P/E10, Market Cap to GDP, and Margin Debt) are at peak levels indicating that much of the future growth and exuberance is already priced in. How much longer will this recovery party run? The U.S. central bank has already begun to taper the stimulus by raising rates and letting its bond portfolio unwind. It’s now up to the economy, itself, to continue to grow and expand on its own. And that’s entirely possible, given its strength.
But tweets and tariffs won’t help. Confusing tweets can’t replace thoughtful policy. And tariffs always stifle trade and economic growth. Last month, 1,140 economists, including 14 Nobel prize winners, signed on to a letter urging political leaders to avoid tariffs and trade wars. The last time such a wide-spread plea was made was in 1930 when 1,028 economists signed a letter urging U.S. Congress to reject the protectionist Smoot-Hawley Tariff Act. Of course, they didn’t, and the Great Depression was soon at hand. Tariffs were not the only reason for the Depression, of course, but they surely didn’t help. And present-day economists know that tariffs, today, won’t help the global economic recovery continue, either. CEOs are on hold to make major expansion plans. Investors are on hold before committing more capital at peak valuation levels. Because the solutions are geo-political, they can very easily resolve themselves quickly and favorably. But if not, our iFolios strategy, which allows for active allocation and protection, is a prudent way to invest.