With both the Southeastern Conference regular season and tournament titles in hand and a record thirteen major league draft picks on the roster, most baseball pundits predicted Vanderbilt to win the College World Series last week. While a Championship is never a forgone conclusion, picking Vanderbilt to win was the experts’ safe call. Exiting a tough May and facing the markets’ seasonal summer lull, forecasting the best June for the Dow Jones Industrial Average since 1938 was not the safe call for stock market experts. In fact, few if any predicted the June rally let alone the S&P 500 and MSCI All-World equity indices 18.4% and 16.2% gains for the first half of 2019.
The June and year-to-date rallies are just the latest instances of stock markets confounding most forecasters. For several years now, many have anticipated an end to the economic expansion and bull market. High profile investment websites that survive on “click bait” have been negative for even longer. Since bad news drives more web traffic than good news, we would not expect that to change.
To be fair, there is plenty of material from which to paint a dire picture. We are ten years into a market recovery, approaching nearly the longest economic expansion on record, waiting on a hard or soft Brexit, confronted with Iran attacking ships in the Middle East, negotiating a new trade agreement with China, and looking at a yield curve and bond market that appear to be anticipating an economic recession. Put simply, the landscape and path forward for investors has rarely been so complicated. And we haven’t even mentioned the upcoming 2020 elections, which will be here before we know it.
Not Everything Is So Complicated
On the following pages we discuss the election and a few other topics upon which investors are focused heading into the second half of 2019 and 2020. Perhaps not surprising, we continue to believe owning a healthy amount of U.S. and international stocks makes sense for most investors. If you are uncertain whether you are one of those investors, or how much equity exposure makes sense for you, an update to your financial plan is overdue. Please let us help. Determining the appropriate financial plan to meet one’s long-term goals is part of what we do, and there is no better time to tackle the exercise than while markets are up.
Also in this commentary we’ll take a minute to ponder why even in these divisive times, Americans are excited to celebrate Independence Day and collectively paused on June 6th to remember the heroic D-day efforts of the 156,000 U.S. and Allied soldiers who stormed a 50 mile stretch of heavily fortified French beaches 75 years ago. Yes, there is a lot in today’s world that is complicated. Taking the time to honor the sacrifices and accomplishments of our World War II veterans is not.
Someone recently remarked, “It rained twice in Nashville during the first quarter. The first time was for 28 days. The second time was for 33.” February was particularly sloshy with 13.5 inches of rain, exceeding the previous record of 12.4 set in 1880. Nashville was not alone in breaking records. Throughout the United States, dozens of snow, rain, and heat records were tied or broken.
This weather maelstrom, a government shutdown, ongoing trade tensions, and a Brexit mess, have likely depressed first quarter U.S. and global economic activity. We’ll soon know more as companies begin reporting first quarter earnings and the government’s economic data estimates are released. In March, we learned the U.S. economy grew just 2.2% in the fourth quarter versus an initial 2.6% estimate. The trillion dollar question is whether this growth slowdown is temporal or if it portends a coming end to the second largest economic expansion on record.
2018 is the first year for tax filers to be impacted by the 2017 Tax Cut and Jobs Act (TCJA). This law included many changes affecting business and individual filers. For individuals, some of the more significant changes included increasing the standard deduction while limiting how much mortgage interest (for new mortgages) is deductible. It also limited the amount of state and local taxes one can deduct on their Federal taxes. We recommend consulting with a tax advisor to understand what the TCJA means for you. With these big changes, we think this tax season will be one to remember for professional preparers and filers alike.
Thanksgiving fell early this year, which meant the resulting holiday shopping season included six weekends. Retailers welcomed the extra time to promote their wares. Shoppers had more time to find an additional gift or two. The combination produced the strongest holiday shopping season in six years – a welcome end to the year for a sector still trying to find its footing in an online world.
Investors hoping for their own strong end to the year were mightily disappointed. December’s 9% decline was the worst December for the S&P 500 since 1931. As a result of this sell-off, 2018 was the first year since 1948 that the S&P 500 finished negative after being up through the first three quarters of the year.
We know markets tend to surprise investors just when they begin to rely on a particular pattern. The explanation for the December and fourth quarter market malaise, however, is not that simple. On the following pages we’ll recap what turned out to be the most difficult year for all asset classes since 2008. We’ll also provide some insights into how we are approaching 2019.
In 2018, the place to be for investors has undoubtedly been U.S. stocks. Up 11% year-to-date, the S&P 500 has outperformed virtually every other major, and not so major, stock market in the world and by wide margins. The disparate performance has given new meaning to Dorothy’s proclamation in the Wizard of Oz that “there’s no place like home!” This nostalgia for “home” is particularly strong among U.S. investors with enough income independence to allow for meaningful exposure to U.S.-listed growth stocks, which generally do not pay dividends.
There are exceptions to this 2018 growth stock success. Tesla and Facebook probably prefer a 2018 do over, or at least the retraction of a few tweets. Yet, in general, the strength of U.S.-listed large-cap growth stocks has pulled the market higher. In fact, Apple, Amazon, and Microsoft alone are responsible for almost 40% of the S&P 500’s 11% year-to-date increase, resulting in approximately $500 billion of additional market capitalization for just these three companies.