2nd Quarter Client Note – The Raging Bull

By almost any measure, the past decade has been one of the best 10-year periods in history for the US stock market. Quarter after quarter, with just a few hiccups, the market has climbed steadily since the market bottomed in March of 2009.  This past quarter was no exception, with the S&P 500 (total return) Index gaining 4.30%; bringing the gain to 17% for the first half of the year.

Virtually all asset classes were in positive territory. The international developed markets MSCI World ex USA (net div) Index rose 3.79%. Global Real Estate rose 2.64%. On the equity side, emerging markets were the laggard, with the MSCI Emerging Markets Index rising just .061%

Per usual, our friends at Dimensional Funds have compiled a comprehensive review of the results in their Quarterly Market Review.

The Bond Market is Confused

The Barclays US Aggregate Bond Index rose 3.08%, its highest quarterly return in more than seven years. After several years of raising rates on account of a growing economy, the Fed paused in the second quarter and has even begun signaling that it may reverse course and lower rates in the future. The market picked up on these signals and yields decreased across the maturity spectrum.  The yield on the benchmark 10-year Treasury fell by 41bps, to 2.00%.

It remains to be seen what the Fed will do in the face of ambiguous data on the continuing strength – or not – in the US economy. Will we enter a recession or will the economy continue its decade long expansion off the lows of 2009? Nobody knows, suggesting this is no time to be making big bets on the direction of future interest rates.

Maintaining Your Cool

As midsummer temperatures approach the upper 90’s in some parts of the country (not, of course, here in the high Rockies) it’s good to remember some of the ways to calibrate your investment temperament so that you don’t lose your cool in the face of inevitable market volatility. Our aforementioned friends at Dimensional Funds recently offered two “evidenced-based”  lessons to keep us hydrated when we have to sweat out a bear market.

The first, The Uncommon Average, is actually quite reminiscent of the weather; and is one of my favorites from way back when I started in this business. Looking at Exhibit 1, we observe that the average annual return of the S&P 500 Index over the last 93 years has been 10%. But an investor actually achieving that average over her investing lifetime is no mean feat. In only six of those years has the return been within 2 percentage points of the average. In most years, the return is either way above or way below the average. Just like in your neck of the woods, where the average temperature may be a pleasant 65 degrees, but you only get a handful of such days in the spring and fall – and you have to endure the freezing cold days of winter and the blistering hot days of summer to get there.

The second lesson, Timing Isn’t Everything, is for those who think they can bob-and-weave their way around market volatility with tactical asset allocation – getting out before the market drops and back in before it rises again. Unfortunately, there are no green and red lights, signaling when it is safe to stop or go. Only constant flashing yellow ones. As Exhibit 1 here shows, for example, the S&P 500 has almost always produced positive annual returns following new market highs. Reliably timing the market, even by professional investors, is nearly impossible.

So, what to do? Always observe the flashing yellows. And proceed with caution, by controlling what you can control in a disciplined fashion: your spending plan, your asset allocation, taxes, etc.

Just tune out the noise. Turn on the funk. And enjoy your summer.

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