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Are we in the late stages of a bull market—that time when the market suddenly takes off like a rocket for no apparent reason?
Over the last eight years, the S&P 500 index has returned more than 300%. But the tail end of this run seems to have accelerated the trend. The first quarter of 2017 provided the highest returns for U.S. large-cap stocks since the last three months of 2013. The Nasdaq index has booked its 21st record close of the year so far, and the indices have recorded a 30% rise over the past six quarters, marking the fastest advance since 2006.
The first quarter of 2017 has seen the Wilshire 5000 Total Market Index—the broadest measure of U.S. stocks—rise 5.72%, while the widely-quoted S&P 500 index of large company stocks was up 5.53%. As measured by the, Russell 2000 Small-Cap Index, investors in smaller companies posted a relatively modest 2.26% gain over the first three months of the year.
Even the international investments were soaring through the start of the year. The broad-based EAFE index of companies in developed foreign economies gained 6.47% in the first three months of calendar 2017. In aggregate, European stocks gained 6.74% for the quarter, while EAFE’s Far East Index gained 5.13%. Emerging market stocks of less developed countries, as represented by the EAFE EM index, rose 11.14%.
Our global equity fund, DFA Selectively Hedged Global Equity (DSHGX), finished the quarter with an impressive 6.38% gain.
Looking over the other investment categories, real estate investments, as measured by the Wilshire U.S. REIT index, eked out a 0.03% gain during the year’s first quarter. Commodities returns, as measured by the S&P GSCI index, lost 2.51%, in part due to a 5.81% drop in the S&P crude oil index. Gold prices shot up 8.64% for the quarter and silver gained 14.18%.
In the equity-like portion of our model portfolios the returns were similarly mixed. Our commodity fund, DFA Commodity Strategy (DCMSX), did comparatively good compared to the index closing out the quarter down 1.47%. Also, the DFA Global Real Estate (DFGEX) did well posting a modest gain of 1.92%. Ironclad Managed Risk (IRONX), a strategy that sells put options on equity indices and exchange traded funds, finished up 1.38%. AQR Style Premia Alternative Fund (QSPIX), added 1.11% for the quarter. Rounding out the mix of equity-like funds, Steben Managed Futures Strategy (SKLIX), remained almost flat, with a 0.10% return for the quarter.
In the bond markets, short-term interest rates are incrementally rising from practically zero to not much more than zero. Coupon rates on the longer 10-year Treasury bonds now stand at 2.39% a year, while 30-year government bond yields have risen to 3.01%.
In the loaned portion of our model portfolios, DFA Selectively Hedged Fixed Income (DFSHX), closed the quarter higher with a 1.49% gain. DFA Investment Grade (DFAPX) added 1.09%, while our inflation-protected bonds fund, DFA Inflation Protected Securities (DIPSX), posted a 1.5% gain. Our high yield bond fund, Principal High Yield (PHYTX), finished up 2.93% for the first quarter.
The pundits on Wall Street have been telling us that the market’s sudden meteoric rise—which really accelerated starting in December of last year—is the result of the so-called “Trump Trade,” shorthand for an expectation that companies and individuals will soon be paying fewer taxes and be burdened by fewer regulations, leading to higher profits and greater overall prosperity. Add in a trillion dollars of promised infrastructure spending, and the expectation was an economic boom across virtually all sectors.
However, there is, as yet, no sign of that boom; just a continuation of the slow, steady recovery that the U.S. has experienced since 2009. The latest reports show that the U.S. gross domestic product—a broad measure of economic activity—grew just 1.6% last year, the most sluggish performance since 2011. The U.S. trade deficit widened in January, and both consumer spending and construction activities are weakening from slower-than-average growth rates.
The good news is that corporate profits increased at an annual rate of 2.3% in the fourth quarter, which shows at least incremental improvement. However, the previous three months saw a 6.7% rise in profits, suggesting that the trend may be downward going forward.
It’s possible to read too much into the recent failure of health care legislation and assume that we’re in for four years of ineffective leadership. There will almost certainly be a tax reform debate in Congress in the coming months, but the surprising aspect—as with the healthcare legislation—is that there seems to have been no pre-prepared plan for Congress to vote on. We know that the Republican President and Congress want to lower corporate tax rates and simplify the tax code—which, in the past, has meant adding thousands of new pages to it. Leading Democrats oppose any cuts to corporations or the affluent. We know that there is general opposition to any form of estate taxes, but nobody is proposing which deductions would be eliminated in order to make this package revenue-neutral.
Similarly, there have been no details about the infrastructure package, which means we don’t know yet whether it would be a budget-busting package of pork barrel projects or a real contribution to America’s global competitiveness.
We can, however, be certain of one thing: as the bull market ages, we are moving ever closer to a period when stock prices will go down, perhaps as dramatically as 20% or more, which would qualify as a bear market. This is a good time to remind yourself that a 20% drop in your portfolio will not mean the end of the world or your lifestyle. If the thought of a significant drop would panic you into selling (no doubt precisely at the wrong time) this might be a good indication you are taking too much risk and it’s time to revisit your stock and bond allocations. If you are retired, now is a good time to place two or three years of income in a money market account.
On the other hand, if you’re not fearful of a downturn, then you should look at the next bear market the way the most successful investors do, and envision a terrific buying opportunity, a time when stocks go on sale for the first time in the better part of a decade. For some reason, people go to the shopping mall to buy when items go on sale, and do the opposite when the investment markets go down. Knowing this can be an unfair advantage to your future wealth, and even make you look forward to the end of this long, unusually steady, increasingly frantic bull run in stocks. After all, if history is any indication, the next downturn will be followed by another bull run.