“Good investors gather information, put that information into current and historical context, then make sound decisions.”
With respects to Rodgers and Hammerstein’s 1945 musical Carousel, June is indeed bustin’ out all over for equities. After a May that had technical analysts and trend followers on the edge of their seats, June burst onto the stage and made back 85% of May’s decline is just one week. It then took a brief rest the second week before busting higher today, the 18th, with several large cap indexes breaking to all-time highs. These breakouts still need to be confirmed and tested, but it is much nicer hovering near the top of a trading range, then hovering near the bottom of a trading range like equity markets were at the end of May. The Russell 3000 Index is now up +16.51% YTD, with the S&P 500 Index up +16.40%, the S&P MidCap 400 Index up 15.11%, and the S&P 600 Small Cap Index up +10.10%.
Equity markets in the month of May reminded me of the myth about the elephant’s fear of a mouse. The movie “Dumbo” and Saturday morning cartoons depicted images of an elephant cowering from a mouse. This myth has been largely debunked with the explanation that elephants, which have relatively poor eyesight, simply become startled when mice dart past. Of course, an elephant certainly has superior mass to dispatch a mouse. Their quick, frantic movements are simply intolerable. Now, consider the possibility that the U.S. economy, and in turn, the U.S. financial markets, the strongest in the world, are the elephant. Secondary events such as trade concerns, and upcoming elections, are the mice. The quick, frantic reports on the mice movements are our overly dramatic news media. And there you go.
Bond markets were strong in May, and have continued their rally in June. This is largely because of the growing sentiment that the Federal Reserve is contemplating a cut in short term interest rates. With the Federal Reserve meeting this week, that sentiment has propelled investment grade bonds even higher. High yield bonds have been the big beneficiaries of both a positive equity market and a favorable interest rate environment. And as we reported last month, every bond index that we monitor continues to be in positive territory for the year-to-date. The Bloomberg Barclays U.S. Aggregate Bond is up +5.25%, the Bloomberg Barclays Municipal Bond Index is up +4.82%, and the Bloomberg Barclays U.S. Corporate High Yield Bond Index is up +8.90% YTD.
International equity markets continue to lag behind U.S. equity markets but are gaining ground as well. The MSCI EAFE Index is up +10.57%, while the MSCI Europe Index is up +12.12%. Emerging markets indexes continue to be largely influenced, both positively and negatively, by the U.S./China trade talks, and are up +5.68%. Once again, domestic financial market conditions are rewarding both equity and bond investors with positive returns. This continues to underscore the dominant position of U.S. financial markets versus international financial markets.
From a sector perspective, the leaders are once again technology and consumer products. The obvious laggards are energy and health care. The hottest new sector is real estate. The supporting numbers are as follows. The S&P Composite 1500 Information Technology Sector Index is up +23.22% YTD. The S&P Composite 1500 Consumer Discretionary Sector Index is up +19.75%, while the S&P Composite 1500 Consumer Staples Sector Index is up +16.41%.Meanwhile, the S&P Composite Energy Sector Index is up +7.28% and the S&P Composite Health Care Sector Index is up +6.72%. The new kid on the block is the Dow Jones US Real Estate Index which is up +22.15%.
Despite the recent strength in the large cap indexes, most domestic equities remain in a trading range. It will take more work to confirm the large cap breakout. Then it will remain to be seen how the mid cap and small cap equity markets follow suit. One of the interesting facts of the market rise has been the strength of the defensive equity sectors. Consumer staples, real estate and utilities sector have all broken out to new highs in advance of the traditional aggressive equity sectors. The only exception is the health care sector, which may be under the political spotlight in the upcoming election year from both parties. This strength in defensive sectors reflects institutional caution moving forward.
The long-term bull market continues to be the elephant in the room, mixed animal metaphors aside. As we have stated previously, it is important to maintain focus on the big picture, and not get caught up in the dramatic narrative. Tactical asset allocation is our best approach for taking advantage of the opportunities and managing the risks.
Edward D. Foy, Manager, SELECTOR® Money Management.
Sources: Bloomberg.com, Marketwatch.com,