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Most clients I have met with recently show surprise when I tell them the first half of the year was a good one for investors. As one client said, “How is that possible with all the problems in the world?” She ticked off the unrest in the Middle East, ISIS, our strained relations with Russia, the instability of North Korea, not to mention the tweeting antics of President Trump and Congress’s inability to fix health care or provide tax relief. To her, all these appear to be good reasons for markets to be going down, not up.
Her response isn’t unusual. Most people mistakenly assume that markets rise when there is good news and do poorly when there is turmoil and pessimism. Actually, it’s often the opposite.
The U.S. stock market has more than tripled in value during the runup that started in March 2009, when the world as we knew it seemed to be ending. The most recent quarter somehow managed to accelerate the upward trend. We have just experienced the third-best first half, in terms of U.S. market returns, of the 2000s.
Still, as good as markets were to investors, economic growth was admittedly meager in the first quarter. The U.S. GDP grew just 1.4% from the beginning of January to the end of March.
The S&P 500 index of large company stocks gained 2.41% for the quarter and is up 8.08% in the first half of 2017. International stocks are finally delivering better returns to our portfolios than US stocks. The broad-based EAFE index of companies in developed foreign economies gained 5.03% in the recent quarter and is now up 11.83% for the first half of calendar 2017. Our global equity fund, DFA Selectively Hedged Global Equity (DSHGX) finished the quarter up 3.17%, and is now up 9.75% for the first half of the year.
Real estate, as measured by the Wilshire U.S. REIT index, gained 1.78% during the year’s second quarter, posting a meager 1.82% rise for the year so far. Our REIT fund, DFA Global Real Estate (DFGEX) finished the quarter up 1.79%, and is now up 3.75% for the first half of the year.
The energy sector, which was a big winner last year, has dragged down returns in 2017. The S&P CI index, which measures commodities returns, lost 7.25% for the quarter and is now down 11.94% for the year, due in part to a 20.43% drop in the S&P petroleum index. Our commodity fund, DFA Commodity Strategy (DCMSX) finished the quarter up 0.52%, and is now down just-3.59% for the first half of the year.
In the equity-like portion of our model portfolios we saw Ironclad Managed Risk (IRONX), a strategy that sells put options on equity indices and exchange traded funds, up 1.64% for the quarter, and is now up 3.02% for the year. AQR Style Premia Alternative Fund (QSPIX), a strategy that invests long and short across six different asset groups: stocks of major developed markets, country indices, bond futures, interest rate futures, currencies and commodities based on four investment styles: value, momentum, carry, and defensive, added 0.20% for the quarter, up 1.31% for the year. Rounding out the mix of equity-like funds, Steben Managed Futures Strategy (SKLIX), had a loss of 3.83%, making it down 3.73% for the year.
This proves once again the value of diversification. Just when you start to question the value of holding a certain investment or wonder why the entire portfolio isn’t crowded into one that is outperforming, the tide turns. If only this were predictable.
In the bond markets, longer-term Treasury rates haven’t budged, despite what you might have heard about the Fed raising interest rates. The coupon rates on 10-year Treasury bonds have dropped a bit to stand at 2.30% a year, while 30-year government bond yields have dropped in the last three months from 3.01% to 2.83%.
Our high quality bond funds, DFA Selectively Hedged Fixed Income (DFSHX), closed the quarter higher at 1.15% gain, and is up 2.65% for the year and DFA Investment Grade (DFAPX) added 1.49%, up 2.60% for the year. Our Treasury Inflation Protected (TIPs) fund, DFA Inflation Protected Securities (DIPSX) was down 0.34% for the quarter, making the fund up 1.16% for the year, while our high yield bond fund, Principal High Yield (PHYTX), finished up 1.63% for the quarter and is now up 4.59% for the year.
Some good news: the unemployment rate is at a near-record low of 4.7%, and wages grew at a 2.9% rate in December, the best increase since 2009. The underemployment rate, which combines the unemployment rate with part-time workers who would like to work full-time, has fallen to 9.2%, its lowest rate since 2008.
The current bull market is aging, however. The runup has lasted far longer than anybody would have expected after the 2008 crisis. Inevitably, although it’s impossible to predict exactly when, we are approaching a period when stock prices will go down. It is always good to remember that the stocks in your portfolio will eventually plunge by more than 20% (which is the definition of a bear market). This might be a good time to revisit your stock and bond allocations and be sure you are diversified into five or more asset classes.
If you have any questions, please don’t hesitate to email us at firstname.lastname@example.org