First there is watching grass grow. Then there is watching paint dry. But right behind is the stock market.
Ten years ago, in 2008, you may have chosen not to follow your investments due to one month’s bad news being followed by the next ones even worse. By way of contrast in the past four months you may have chosen to not follow your investments because…well, why bother? Each month ended pretty much where the month before ended. All this by way of reminder that the journey of an investor contains times of real joy and occasional times of fear but this current time of real boredom is well… boring.
First, allow me to review the perambulations of the market year to date after which I’ll connect several dots and create a scenario that I believe will be worth waking up for. Remember 2017? Every month the market went up. The amount varied but the direction seemingly was inexorably upwards. The first three weeks of this year was more of the same with the market up nearly 7% .Then the floor fell out from under it and by early March the market had fallen 10% though the subsequent modest recovery left it at break even for the first three months of the year. Since that time the market has gone back and forth like a hypnotist’s watch in front of your eyes first up a little, then down a little but frustratingly returning back to where it began the year. We’ll agree that back and forth is a great deal better than down and out but if you’ll allow me to explain the recent past I do believe that it will provide us a road map of where the remainder of this year’s journey is likely to take us.
Imagine a balloon. You blow into it and it fills up with air. You blow into it still more and its surface becomes tense with the internal pressure. That is a description of the stock market entering into this year. Normal markets experience an ebb and a flow where advances are followed by occasional and hopefully more modest declines allowing the market to rise while releasing its internal tension. The 2017 market was unusual in the absence of the usual. The January 2018 stock market rise was a happening looking for an accident and the market went down because of the imbalance created by investors enjoying significant returns while having experienced little in the way of risk. The 10% decline restored that balance and by early April the market had acquired an appearance somewhat similar to that of last year with the economy delivering the sunny news beloved of stock market bulls. That recovery was preempted a month ago by fears of tariff wars and it was those fears that drew the market down to low single digits by the end of June.
Focusing on the overall market though obscures a level of activity within it that has been hidden by the seemingly aimless meanderings of the various indices that tend to capture the headlines. Large cap growth is up 11.2% for the year to date. Small cap stocks are up 10%. For a year that is barely past half time those aren’t bad numbers and actually rival last years. But large cap value stocks are only breaking even and the seemingly permanently underperforming foreign markets are down overall near 3%. So you put the pieces together and you have overall stock market returns of plus 3% year to date through the end of June proving it’s hard to win a game when only half your players are participating. Psst…allow me to share a small secret with you though. The market is up 3 ½% since July 1st. This bull never died and like many investors was only sleeping. But the bull has awoken and this is likely to be a show you wouldn’t want to miss.
As I’ve shared with many of you in the past it isn’t good news or bad news that drives markets but rather whether the news is better or worse than the markets expected it to be so let’s spend a little time discussing the average investor’s expectations of the market. Everyone and their mother by now knows that the economy is doing quite well. Most didn’t expect it to do this well and most expect that this is likely as good as it gets. In other words, deceleration while still heading in a positive direction. That is what the market expects and that is what it is priced for. That is perception. What about reality? How about an economy that isn’t as good as it gets but rather one that is good and getting better? What if we have an economy that is not only growing near 4% currently but an economy that grows at that rate or even faster for the next four to six quarters? If that is reality and reality is far more positive than expectations then the market may well be poised to experience a “positive shock” meaning that monitoring your investment returns through the end of the year may well qualify as a spectator sport worth buying a ticket for.