“Good investors gather information, put that information into current and historical context, then make sound decisions.”
If you’ve been paying attention to domestic equity markets the past six months, you’re probably getting sleepy. Rhythmic, rocking motions will do that. The Russell 3000 Index has been cycling inside of a 7% trading range for the last six months. Small cap and mid cap equities have been swinging inside a 10% trading range. Equity indexes rotate upwards to within a few percent of all-time highs, then pull back. This persistent failure to break out has institutional investors stocking up on historically defensive sectors, while continuing to hold key aggressive sectors.
Year-to-date performance numbers are still inflated by the first quarter super-bounce. The large cap S&P 500 Index is up +21.05% YTD. The S&P MidCap 400 Index is up +18.01%, while the S&P 600 Small Cap Index is up +13.85%. These numbers are impressive, even as it appears that domestic equities are becalmed. The initial decline of October 2018 decline is rapidly slipping through the rolling 12-month returns, but that still leaves the December 2018 drop. The last haunting from the fourth quarter will last through Christmas Eve.
International equity markets continue to follow suit. There is still plenty of drama with Brexit, and with the Ukraine, and with the longer-term effect of negative interest rates, not to mention the ongoing military actions in Syria. But if you check the scoreboard you find that the MSCI Europe Index is up +15.7%, the Tokyo Nikkei Average is up +12.4%, and even the MSCI China Index is up +11.6%. These are well above average returns YTD. All of these equity markets are going to be shaking off the same boogie-man that spooked U.S. markets in the fourth quarter of 2018. The global Bull Market scenario is still in place.
Sector stories abound, especially those normally associated with contrarian opinions. Domestic equity markets have been bouncing off the top of the trading range for months yet staying within striking distance. The ‘barbell’ trades, portfolios over-weighted with both technology and real estate, with both consumer stocks and utilities, are already heavily developed. What about gold? What about oil? The fact is, traditional investment sectors are performing so well, the U.S. Dollar has been so steady, and inflation numbers have been so low that contrarian trades like gold and oil are difficult to justify. At least for the time being.
Bonds continue to reward investors. All of our primary bond indexes are firmly in positive territory. Their year-to-date returns are more than adequate, and their charts are technically sound. The Bloomberg Barclays US Aggregate Bond Index is up +8.34%, while the Bloomberg Barclays Municipal Bond Index is up +6.85%. The Bloomberg Barclays US Corporate High Yield Bond is now up +11.65%, while the Bloomberg Barclays Global Aggregate Bond Index is higher by +6.56% YTD. This creates a very comfortable scenario for conservative investors who rely upon bond allocations to manage equity portfolio volatility.
Equity investors are unlikely to be as patient. Both aggressive investors and defensive investors have taken positions that have seen some levels of success. The barbell trade has also been effective. But equity investors don’t like to be rocked to sleep. They want action and they want results. The strength of the economy plays well for the aggressive trade. The political uncertainty favors the defensive side. The China trade talks have been on the table for so long that one has to wonder how much room is still available. Crowded trades are rarely dynamic trades. It will be interesting to see who folds and who sweeps the pot.
Edward D. Foy, Manager, SELECTOR® Money Management
© 2019 Edward D. Foy