Mid-Year Check Up

July 24, 2018 - John Osbon (3 mins to read)

Where were we one year ago? Have your investments gained value or slid? It’s hard to keep track when economic and political news is so loud. We’ve had two years of market anxiety – from Brexit and nominee Trump to tariff trade wars and non-stop interest rate increases. Fears persist. So let’s take a mid-year time out and figure out which way is up.

The Bezos indicator points upward

One year ago the Amazon chief was worth $82 billion via his 82 million shares of AMZN. One year later he is worth $150 billion and is now the richest person who has ever lived. Maybe just as amazing, Amazon’s market value exceeded Apple’s briefly last week. They are still neck and neck. Apple was up only 28% in the last year compared to Amazon’s 80%. AMZN is up so much more than its counterparts that it now comprises a whopping 21% of VCR, Vanguard’s Consumer Discretionary ETF.

My point is simply that investments can go much higher for much longer than most investors can imagine. Amazon has been going up even though President Trump has been personally attacking it on Twitter. Apple has been going up even after its seeming product saturation. There’s no automatic time limit on gains…or losses.

More growth already happening

Over the last year, the NASDAQ is up about 22%. The S&P 500 is up more than 13%. Very nice gains, but easy to miss with the news cycle focused on a hundred other stories. Your own results, of course, depend on your personal asset allocation. Stocks in developed economies have roared forward for ten years. Emerging markets and gold, on the other hand, are taking their time.

Investment gains come in short bursts

Over the last century, the unmistakable direction of the stock market is up, by many thousands of percent. But gains don’t come evenly or predictably. Big gains often come in short blasts. In the last five years alone we’ve had two big spike years: US markets up 33% in 2013 and up 21% in 2017. In Q1 of 2013 alone, we saw a 10% gain.

On Friday, July 27th, the second quarter GDP estimate will be published by the government. Economists expect the US economy grew by 4% in the second quarter, almost double the growth rate for the first quarter. The reasons for strong growth are easy to see: a favorable tax policy, excess corporate cash, and an America-first trade policy. Naysayers and pessimists point to stalling home prices and erratic politics. Both sides have good points but the fact is that the US economy is strong, growing and broadly accelerating. Whether those factors translate into more stock gains this year remains to be seen.

What about rising interest rates?

A year ago, a broad US stock market ETF had a higher yield than the two-year Treasury. Today, that relationship has reversed due to a steady series of rate increases. The Fed Chairman, Jerome Powell, has signaled more rate increases this year. Conventional industry wisdom says stocks go down when rates go up. But not so far this time. We are in uncharted rate waters. Again, we can’t predict what happens next.

Stay diversified

Our advice remains the same as before the Great Recession and ever since – use diversification to your advantage, including recently lagging asset classes such as emerging markets and gold. Add custom municipal bonds, private equity and/or unique private investments when it makes sense for you. It will be important to own investments other than big US stocks when the long bull market inevitably dries up, whether that is four months or four years from now.

July is typically a relatively quiet and listless time in the markets, making it a good time to check your diversification, rebalance as necessary and make sure your personal risk metrics continue to match your financial situation.


PS – There’s one other big difference between today and one year ago: Max and Rachel are engaged. It’s time to be optimistic in many ways.



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