Stock market returns were strong in the month of July with all four US equity indexes we follow posting solid gains. Global markets were just as strong with the MSCI World and MSCI EAFA higher for the month. After a surge of strength earlier this year the US dollar was slightly lower. Finally, commodities and bonds were flat for the month.
U.S. & International Stock Index Returns
|Index July 2018 Year-to-Date|
|Dow Industrials 4.63% 2.82%|
|S&P 500 3.67% 5.34%|
|S&P 400 (Midcap) 1.73% 4.42%|
|S&P 600 (Small Cap) 3.64% 12.03%|
|MSCI World 3.03% 2.36%|
|MSCI EAFE 2.31% (2.18%)|
|Bloomberg Agg. Bond (1.59%)|
|CRB Commodity Index 0.34%|
|US Dollar Index 2.67%|
All data as of 7/31/2018, Source: WFA Investment Institute. [Wells Fargo Investment Institute, Inc. is a registered investment advisor and wholly-owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.]
When most anyone discussed the “stock market” the discussion is about either the Down Industrials (“The Dow”) or the S&P 500 with little thought about the individual stocks that are represented by the indices. In chart #1 we take a look at the S&P 500 and the clear uptrend that has occurred over the past few years. Sure, we experienced a quick 10% correction in February, but the index is pushing back toward the all-time highs set earlier this year. From the big picture the “stock market” appears to be doing very well.
The stock market, it should be noted, is a market made up of individual stocks (companies) that do not all act like” The Dow” or S&P500. Individual stocks will diverge from the prevailing market direction if there is positive or negative reported. Sectors (utilities, technology, etc.) will also diverge at different times in the economic cycle. Point is the “stock market” is really a market of stocks.
Which leads us to the bottom two panels of Chart #1 which show the relative performance of the S&P500 Growth Index (middle) and S&P500 Value Index (bottom). Since the market bottom in February 2016 growth has outperformed value – substantially. The divergence between the two investment styles has most notably increased over the past six months as value has struggled at a time that growth stocks have surged.
It is not uncommon for one style to be favored over the other at any given time. Over time, value and growth have produced about the same returns. In July the value index outperformed the growth index after a long period of underperformance. The big question we are considering is what this all means. Has value started to return to favor or was July a short-term aberration?
The 10-year Treasury yield crept up slightly in the month of July, reinforcing the orderly uptrend that has now entered its third year. Yield remain just below the 3.00% level but we expect to see a move above the May 2018 highs at some point in the near future. Once that happened the real question is if the higher yield environment is a new move to higher levels or just a technical break higher that soon resolves itself back at lower levels.
July was another consolidation month for the US Dollar Index which stayed in a relatively tight range. This is a continuation of what we witnessed in June. We expect the consolidation to continue as long as trade issues are not resolved in some manner. We believe that new trade agreements will result in a lower dollar and no agreement will likely result in the next move higher for the dollar index.
The commodities downturn in June continued in July with the CRB index ending the month below the uptrend line and just at the 200-day moving average. The next thirty days should give some clarity to long-term direction for the index.
Summer 2018 has a very different feel than those of the recent past. Gone are the days of little news from New York or Washington. No. As we enter the final weeks of summer there is no shortage of news – mostly good, some negative, other potentially either or both. And every day the news keeps on coming.
The second quarter of the year was economically very good for the USA as well as corporate America. GDP came in north of 4% as S&P 500 companies have reported phenomenal growth numbers. Some of the growth can be directly attributed to the tax cuts. That said, even without the lower tax rates both top line revenues and bottom line profits have been better than one would have expected just six months ago. Throw in the low unemployment rates and what you have is an economy running close to or at capacity.
The negative comes from, of all places, Washington (hard to believe, we know). Specifically, we have the overhang of tariffs and “trade wars” which affect many publicly traded firms. We also have rising tensions with Iran, an oil producing country with both a strong army and navy. Right now, the effects are uneven. Some companies are benefitting while many more left to manage higher input costs (ex. Steel, aluminum, oil) or lower values for what they sell (mainly food products). If there is escalation of said tensions we fear more of the same.
“May you live in interesting times” is an English expression that is purported to be a translation of an old Chinese curse. It is considered to be a curse because interesting is not usually very productive for investors. In the stock market higher volatility is tied directly to lower prices. Markets generally move higher in a very boring, almost methodical manner. Right now that is what is happening.
So we enter the two most challenging months of the year for the stock market – August and September – in a really good place. Earnings have been good; the economy is good; possible bad news is not in the immediate future. Yet there is a bit of unease knowing tensions linger. All the positives can be wiped out with just one mistake, one imprudent decision by the global political leadership. As a result, we remain positive on the stock market with dose of skepticism.
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An index is unmanaged and not available for direct investment. Index returns do not reflect the deduction of fees, expenses or taxes. Returns are U.S. dollar based unless indicated otherwise.
Past performance does not guarantee future results and there is no guarantee that any forward looking statements made in this communication will be attained. The indices presented in this communication are to provide you with an understanding of their historic performance and are not presented to illustrate the performance of any security. Investors cannot directly purchase any index
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Technical analysis is only one form of analysis. Investors should also consider the merits of Fundamental and Quantitative analysis when making investment decision. Technical analysis is based on the study of historical price movements and past trend patterns. There is no assurance that these movements or trends can or will be duplicated in the future.
Stocks offer long-term growth potential, but may fluctuate more and provide less current income than other investments. An investment in the stock market should be made with an understanding of the risks associated with common stocks, including market fluctuations.
Investing in foreign securities presents certain risks not associated with domestic investments, such as currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share price volatility.
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Investing in commodities is not suitable for all investors. Exposure to the commodities markets may subject an investment to greater share price volatility than an investment in traditional equity or debt securities. The prices of various commodities may fluctuate based on numerous factors including changes in supply and demand relationships, weather and acts of nature, agricultural conditions, international trade conditions, fiscal monetary and exchange control programs, domestic and foreign political and economic events and policies, and changes in interest rates or sectors affecting a particular industry or commodity. Products that invest in commodities may employ more complex strategies which may expose investors to additional risks, including futures roll yield risk.
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Robert I Cahill, Managing Partner Rob.Cahill@wfafinet.com
Jeffrey T. Bogert, Partner
Jonathan D. Soden, Partner Jon.Soden@wfafinet.com
Robert Sweeney, Financial Advisor Bob.Sweeney@wfafinet.com
Jay Knight, Associate Financial Advisor Jay.Knight@wfafinet.com