Since we are coming up on the end of June – the mid-point of the calendar year – that makes it a good time to look at market performance and see how our portfolio is performing so far in 2018.
In short, it has cooled off significantly from last year, although that’s to be expected given the blazing returns posted in 2017 when the S&P 500 was up 20%. This came after another double-digit growth year in 2016 (+13%) when the market took off like a rocket after the Presidential election in anticipation of corporate tax cuts, which were delivered.
S&P 500 MARKET – This year had some early jitters (down -10% in February), but fortunately, that did not last long. For the first half of 2018, the S&P 500 is now up close to 3%. After showing almost 50% growth in the last 4 years, I’m good with market earnings ‘growing’ into it’s current valuation. The trailing price/earnings ratio is very high – it’s at a 25 vs historical 16. Forward price/earnings ration is sitting at a 17, which is right on it’s historical average.
It’s always impossible to predict when a bull market will end, even with such a long-running one as this one. US News & World Report recently looked at 8 popular stock market valuation measures and 6 of them showed the current market to likely be overvalued.
GLOBAL INDICES – International stocks, which also did very well last year (+21%) following several years of poor performance are back in a slump (-3%) in 2018. The global indices are all down – China, Japan, Europe, Russia & Brazil. Clearly the current tiff about tariffs and global trade trade are not helping the rest of the world as expectations are that the USA will end up cutting itself better deals.
BOND MARKET – The bond market – for which I use the Vanguard Total Bond Market Index as a proxy – is down about 3% for the year. If you are thinking that 3% seems like a lot of movement for the bond market, I think you are right – it hasn’t moved that much (in either direction) in quite a few years.
ECONOMIC MEASURES – These seem to be a bit of a mixed bag, although they are likely all moving faster than we have seen in some time. USA GDP was +2.2% in Q1 of 2018, following three really strong quarters of 3% growth. The forecast is for stronger growth in Q2. Consumer spending accounts for 70% of that GDP and it’s great to see Consumer Confidence now reaching an 18 year high. Certainly the historically low unemployment we are seeing is helping that confidence, although there is growing concern that inflation is starting to rear its ugly head with the 12-month CPI rate reaching 2.8% in May.
OUR PORTFOLIO – We continue to struggle with the massive decline in the stock value of my former MegaCorp employer. I left 6 years ago with significant stock options that we exercise each July through 2022. While the stock has rebounded a bit over the last six months, they are still down an incredible 24% this year. That’s a huge weight on our overall portfolio performance and as a result, our overall portfolio is down 4.4% this year. I’m not happy with it, but it could be much worse.
PORTFOLIO MOVES – We’re long-term investors and have no plans to make any changes to our investment strategy in the next 6 months. While I think the markets are showing definite risk – due to their valuation, concerns about a global trade war, and always possible geopolitical instability – we continue to carry a three year buffer of cash to cover any near-term needs.
How is your portfolio shaping up so far this year?
Any other factors that you are watching that could impact returns?
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