2017: SECOND QUARTER REVIEW

Stocks continued to push forward in the second quarter, with the S&P 500 Index gaining 3.1%.  Most sectors were positive, with Technology leading the way. Energy and Communications were the only sectors showing negative returns.  Year-to-date through June 30, the S&P 500 Index had risen 9.3%–not a bad year, and (or but) there are still six months to go.

 

While domestic returns have been good, foreign stocks performed even better. The MSCI EAFE Index (developed countries) rose 6.1% for the quarter and 13.8% year-to-date. The MSCI Emerging Markets Index is up 18.4% year-to-date.

 

Bonds continue to find a way to remain in positive territory despite the Fed having raised the target rate twice this year. The Barclays Aggregate Bond Index was up 1.5% for the quarter and 2.3% for the year. The Fed’s decision to raise short-term rates even as global deflation keeps long-term rates near historic lows has “flattened the yield curve”. In other words, the difference between 2-year and 10-year Treasury yields is the smallest since 2007. The current 2-year yield is 1.4% and the 10-year yield is 2.3% — not much of an incentive to buy long-term debt, but plenty of incentive to issue long-term debt.

 

The reason one should pay attention to the shape of the yield curve is that all seven of the past recessions were preceded by an inverted yield curve (i.e, short-term rates higher than long-term rates). It’s not that an inverted yield curve causes recessions, it’s simply that there will be a higher demand for long-term government debt if people expect slower economic growth (or even deflation) in the future.

 

Last quarter, we mentioned that price volatility in the U.S. stock market had been very low during the first quarter.  That remained true during the second quarter as well. Traders, who make their living on volatility, have had to look to other markets to try and make a buck.  It is an unusual period of calm, but we’ll take it as long as it lasts, knowing full well the calm could end at any time.

 

Some people have said that we must be due for a correction since the market has been on a run for over eight years. Well, not necessarily. From 1978 to 1999, the S&P 500 Index produced a 17.4% average annual return.  During that 22-year stretch, there were only two calendar year negative returns (-4.9% in 1981 and -3.1% in 1990). Interestingly, the one year that many people remember as being bad (1987) was actually a positive year (+5.2%).

 

It’s not common, but other countries have also experienced long stretches of uninterrupted economic growth—Japan from the 1960s to the 1980s, The Netherlands from 1982 to 2008, and Australia from 1991 to present. The Tech Bubble and Financial Crisis are hard to forget (and they shouldn’t be forgotten), but it can be detrimental to your net worth to base future decisions on your most recent past.  Instead, take a long-term view and a long-term approach to investing for retirement.  Your future self will thank you.

 

YTD Performance Summary (as of 6/30/17):