1st Half 2018 Market Overview
Figures references are as of 6/30/2018 unless otherwise stated.
Stocks
The 10 year long-trend that experienced a minor hiccup in Q1’2018 regained it’s footing in Q2’2018: US stocks outperformed their foreign counterparts (Europe, Japan, China, and Emerging markets). That said, 1st Half 2018 was not an exciting place for US stock investors particularly when compared to the stellar results of 2017. The S&P 500 returned just 2.59% year-to-date with high volatility including a ~10% sell-off at the end of January and an ~8% sell-off in mid-March. This as compared to a nearly 10% 1st half start to 2017 with negligible volatility. As of the end of the quarter at 6/30/2018, the S&P 500 closed 5% off it’s all-time high set in late January’2018. European stocks suffered losses in the midst of major political turmoil, particularly in Germany and Italy with the Europe 350 index (ticker IEV) trading at 12% off its multi-year high as of quarter-end. Japan’s MSCI index (ticker EWJ) was down 2% for the year after a 20%+ showing in 2017. The main bright spots have been in cyclical / higher risk domestic stocks. Small companies, consumer discretionary firms, oil producers, and technology firms.
Bonds
US Bonds (Treasuries, Munis, Mortgages, and Corporates) have been negative for 2018 pretty much across the board as interest rates have risen notably since the start of the year which tends to hurt existing bond portfolios while making newer issues of bonds more attractive. The best place to be in this space has been short-term floating rate bonds, something FFG clients have been heavily exposed to in 2018. The average 30-year mortgage at the beginning of 2018 was 3.99% as compared to 4.57% at the mid-point on 6/30.
Tangible Assets (Real Estate and Commodities)
Residential real estate affordability figures, while declining with higher mortgage rates, are still healthy. According to a report by Attom Data Solutions (holder of the largest US residential real estate database), less than half of the 446 counties they analyzed nationwide in 2018 are above their historical average affordability levels. [i]To us, that means, that nationwide, there is still plenty of room for residential home price appreciation barring a major economic decline. In commercial real estate, higher interest rates, the Amazon retail effect, and the ‘We Work’ effect may put more pressure on prices in comparison going forward.
Energy commodities are primarily up for the year while gold suffered a 3.75% 1st half loss due to a strengthening US dollar.
Benchmarks
Our allocation benchmarks provided by Blackrock — the Conservative, Moderate, and Growth allocation funds (ticker AOK, AOM, and AOR respectively) were all in the red as of the end of first half due to the foreign stock weakness and bond returns being negative mentioned above.
[i] https://www.attomdata.com/news/market-trends/home-sales-prices/home-affordability-report-q1-2018/
