Stock prices continued their ascent in the second quarter, adding to the positive returns posted earlier in the year. The S&P 500 Index gained just over 3.0% for the three-month interval, pushing the year-to-date return to 9.3%. Following their stellar returns in 2016, share prices of smaller U.S. companies did not fare quite so well. Nonetheless, the Russell 2000 is up 2.5% for the quarter and 5.0% for the first six months of the year.
With signs of an economic recovery abroad, shares of foreign companies advanced as well. European markets were up 2.4% for the quarter and 7.9% year-to-date, when measured in local currency. For those of our clients planning a European vacation this year, you will note that the Euro has lately gained value against the dollar. Although a night in a Parisian hotel will cost you more, the adjusted value of your foreign stock funds should help offset the increase. This is because the returns from mutual funds investing in foreign companies are generally converted from local currency back to the dollar for U.S. investors. As a result, currency adjusted returns in Europe were an impressive 7.7% for the quarter and 15.9% for the trailing six months, as measured by the major market indices. Meanwhile, the so-called emerging markets from around the world have accumulated substantial results this year, up 6.4% for the quarter and 18.6% year-to-date.
Defying expectations (see below), bond yields declined last quarter as an anticipated increase in inflation failed to materialize. Yields tend to rise in tandem with inflation in order to protect the purchasing power of paid interest. Thus far this year, the yield on the benchmark 10-year Treasury receded from 2.446% at the end of 2016 to 2.298% as of June 30, reflecting recent weak inflation numbers. With interest rates declining the Bloomberg Barclays U.S. Aggregate Bond Index gained 1.45% for the quarter and 2.27% for the year-to-date.
A question that often comes up in casual conversation is “what do you do for a living”. As investment advisors we often hear a follow-on question, which is “what action are you recommending that your clients take now, in light of current circumstances”. After all, we are experienced professionals with access to all kinds of information; we should have an opinion on that, right. If only it were that simple to impress our acquaintances, and clients, with an accurate prognosis for what the future may hold, accompanied by an astute set of market moves that would capitalize on that forecast.
By way of demonstration, a section in the July 3rd edition of the Wall Street Journal entitled “Market Review & Outlook” sighted various “expectations” commonly held by market professionals at the beginning of the year and the actual outcome at the mid-year point. Here are a few examples, as quoted directly from the Journal:
U.S. Stock Indexes – Expectations: Wall Street strategists projected the S&P 500 to end the year up about 5.5%, according to Birinyi Associates. Outcome: Stocks had their best first half of the year since 2013, with the S&P up 8.2% (not including dividends) and setting 24 new closing records.
10-Year Treasury Note Yield – Expectations: Investors expected Federal Reserve tightening and the Trump administration policies to drive the benchmark 10-year Treasury higher. Outcome: The 10-year Treasury yield fell to 2.298% amid tepid economic growth and skepticism about the passage of Mr. Trump’s fiscal agenda.
Dollar – Expectations: The U.S. dollar was projected to strengthen in 2017 as President Donald Trump’s agenda spurred economic growth and justified higher rates. Outcome: The WSJ Dollar Index is down more than 5% this year.
Peso and Emerging Currencies – Expectations: Mr. Trump’s trade stance was expected to drag the Mexican peso and other emerging markets currencies down further. Outcome: Emerging-markets currencies have rallied against the dollar, with central banks in developing countries raising rates. The peso is up 14.4% against the dollar this year.
Oil – Expectations: The pact in late 2016 among major producers to limit output was predicted to stabilize prices. Outcome: U.S. oil prices fell into a bear market on June 20 and have remained below $50 as cuts by the Organization of the Petroleum Exporting Countries (OPEC) failed to lower global inventories.
Inflation – Expectations: Rising oil prices and Mr. Trump’s agenda were expected to drive consumer prices above the Federal Reserve’s target level of 2% in 2017. Outcome: After briefly topping 2% in February for the first time in almost 5 years, consumer prices are rising at the slowest pace in six months.
Volatility – Expectations: Geopolitical uncertainty as well as economic and policy changes in the U.S. were expected to lead to increased market volatility. Outcome: Markets have been calm, with Wall Street’s so-called fear gauge, the CBOE Volatility Index, plumbing its lowest levels in more than two decades.
As Mark Twain observed – “prediction is difficult- particularly when it involves the future”. And yet the siren call of a forecast, when framed in a narrative with a compelling theme, continues to capture the interest of many investors who hope to capitalize on a seemingly prescient insight.
Given that relying on forecasts is not a dependable strategy for managing a portfolio, what approach might an investor employ in organizing her assets? Here at Schultz Collins we seek to refocus the investor’s attention from what the market might do to what the client’s portfolio must do, in order for the client to achieve her financial goals. We help clients to think strategically over the entire planning horizon and make prudent decisions about how their portfolio should be structured to withstand the inevitable shocks to the markets while still accomplishing critical objectives. Our proprietary portfolio risk model has proven essential in this process and we have recently added the ability to model outcomes involving the immediate onset of a bear market (not that we are forecasting one).