Bob’s Journal for 7/17/19
The S&P 500 has been setting records, but they’re not as impressive as they seem at first.
The stock index hasn’t entered the second half of July with a year-to-date percentage gain this large since 1998. There have been only eight years since 1928 (the first year of the S&P 500) that the gain at this point in the calendar year (133 trading days) exceeded this year’s 20.22% total return.
This year-to-date return includes a recent all-time high. One reason this performance isn’t as impressive as it might sound is that after setting a record high in 2018, the index then declined 19.8% to its 2018 low. The latest record high is only a bit above the September 2018 record. It also is not much above the highs of late April and early May 2019.
The major stock indexes have had trouble breaking out of their trading ranges of the last 18 months or so. Without the powerful rally in June, the numbers would be very different.
The June rally was propelled by two events.
One event was the remarks from Federal Reserve officials that one or more interest rate reductions are in the offing for 2019. The other event was the announcement of a truce in the trade conflicts between the United States and China.
Neither event is a direct change in economic or market fundamentals. They only provide hope that things will improve. At best, they merit only cautious optimism.
Another reason to be cautious is history.
In the eight previous years, the S&P 500 had a total return exceeding 20% after 133 trading days. The average and median returns haven’t been attractive over the next month, three months and the rest of the year, according to research from Bespoke Investment Group.
But of course, that’s only average and median results. Each year involved different circumstances and fundamentals. In 1954, the S&P had an additional return of almost 20% for the rest of the year. But in 1987, the return was down almost 20% the rest of the year. That was the year of Black Monday, when the Dow Jones Industrial Average lost more than 22% in one day.
In 1998, the strong gains through mid-July were followed by the Asian financial crisis. The index lost more than 15% over the next three months and then recovered enough to manage a modest gain for the rest of the year.
What history tells us is that we can’t count on stocks to continue performing the rest of the year the same way they have to this point. Sometimes the fundamentals that propelled the index to a 20% or greater return by the 133rd trading day continue for the rest of the year.
Other years, however, events intervened later in the year to change the direction of the markets or the fundamentals that caused the gains to play out.
When I look at the markets and economy, I think you should have some insurance against unexpected events or faltering fundamentals. But you also shouldn’t bail out of stocks. Diversification and balance are the best insurance you can have, while also participating in any continuing market gains.
The Data
Retail sales had a second consecutive solid month. Sales increased 0.4% in June, following a 0.4% increase in May. After excluding autos and gas, sales increased 0.7% in June, following a 0.5% rise in May. Sales were strong throughout the sectors, but were particularly strong among online retailers and restaurants.
The Empire State Manufacturing Survey improved in July after tumbling significantly in June. The General Business Conditions Index from the survey came in at 4.3 for July compared to -8.6 for June.
Despite the improvement, the survey revealed a number of continuing weaknesses in the region’s manufacturing sector. Most significantly, the number of employees’ component declined significantly and is at a level typically associated with recessions.
Industrial Production was unchanged in June, compared to a 0.4% increase in May. But the manufacturing segment increased 0.4% following a 0.2% rise in May. The June number is the best for manufacturing production in 2019. Production overall was unchanged primarily because of a 3.6% decline in utility production, which was weather related. Business equipment production increased 0.5% for the second consecutive month.
The Producer Price Index raised a few concerns about rising inflation. The headline number increased 0.1% in June and now is up only 1.7% over 12 months. But excluding food and energy, the PPI increased 0.3% in June and 2.3% over 12 months. Most of the increases were concentrated in services.
Home builders remain confident. The Housing Market Index from NAHB increased to 65 in July from 64 in June. The highest level of the index recently was 66 in May. As has been the case for some time, traffic from potential customers was the weakest component of the index.
The Markets
The S&P 500 rose 0.85% for the week ended with Tuesday’s close. The Dow Jones Industrial Average increased 2.08%. The Russell 2000 declined 0.10%. The All-Country World Index (excluding U.S. stocks) gained 0.43% and emerging market equities added 0.96%.
Long-term treasuries lost 1.49% for the week. Investment-grade bonds declined 0.31%. Treasury Inflation-Protected Securities (TIPS) added 0.12%. High-yield bonds rose 0.10%.
As for the currency market, the dollar was unchanged.
Energy-based commodities rose 0.58%. Broader-based commodities added 0.77% and gold increased 0.52%.
Bob’s News & Updates
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