I hope you all had a nice time celebrating Independence Day last week. I suppose that’s sort of the unofficial “halftime” for summer, and for the year, too. With that in mind, I wanted to give you an update on the markets, as well as my outlook.
According to Morningstar, the S&P 500 index of large cap U.S. stocks was up about 18.5% in 2019, through June 30. The last time the S&P 500 had such a good first half was 1997. Given that on average I expect the market to make around 10% per year, this about catches us up for last year and this year. International stocks, as measured by the EAFE, were up about 14%, the Russell Mid Cap index was up about 22%, and the Russell 2000 index of small stocks was up around 17%. The last category, small cap stocks, is the surprise to me. Since most small stocks have relatively small exposure to international markets, they are often less influenced by a strong Dollar (which we had) and trade tensions (which we had).
The second half of 1997 was marked by volatility, especially late October, which saw a mini-crash. I’m not predicting anything like that, but I am expecting more volatility in the second half of 2019. The S&P 500 has more or less reached the value that I had expected for the end of 2019. That does not mean that you can’t make money in stocks through the end of the year. I think it will mean that stock selection will be more important, as different stocks and different sectors will take turns outperforming and underperforming.
As of July 8, my indicators are suggesting that the stock market is overvalued. Railcar loads, in particular, are weak, and they have been weak for a couple of months now. GDP estimates are being revised downward and we are in a historically underperforming season of the year. It’s not all doom and gloom, though, as low-interest rates and strong demand are providing support for stocks. We won’t necessarily have a pullback; the market could just consolidate for a while. We are going to be taking profits in discretionary accounts, and re-allocating into stocks that have not performed as well. We continue to try to invest in stocks with increasing earnings estimates. Stock prices usually follow earnings, as investors typically prefer to own shares of companies that are predicted to pass along those earnings in the form of higher share prices or higher dividends.
We’ll also be keeping a close eye on the Federal Reserve, and what decision they make on interest rate policy. There was a great deal of talk about the Board cutting short-term rates in an effort to stimulate the economy, but some recent data suggests that a rate cut might have to wait until later in the year. The short-term direction of the stock market could be very heavily influenced by the next few meetings of the Fed.
I hope you enjoy the second half of 2019, and I hope that the stock market continues on this pace! We’ll monitor and adjust portfolios as warranted. In the meantime, please don’t hesitate to call me to review your portfolio or to revisit your risk tolerance.
As always, these recommendations are mine, and may or may not be the same as those of Raymond James. This is not a solicitation to invest, although we do invite you to review your portfolio with us to see if any changes should be made.