Sellwood’s November 2018 Market Snapshot is available for download.
Third Quarter 2018: The Only Game in Town
The bull market that began in early 2009 is now the longest on record in the United States, surpassing all previous expansions in length (if not in total gain). The continued rally this quarter was a microcosm for 2018 as a whole: U.S. equities were strongly positive, while diversifying asset classes posted negligible returns. Investors have continued to prefer technology and faster-growing companies, with the S&P 500 Growth Index returning 9.3% in the quarter versus the 5.9% posted by the S&P 500 Value Index. Apple made history as it became the first company with a trillion-dollar market capitalization, a feat that Amazon was quick to follow.
U.S. equity has been the only game in town; returns for other major assets have disappointed. A continued trade war has pushed the US dollar upward, harming both international markets and their returns to U.S. investors. Emerging markets, many of which depend on debt issued in U.S. dollars, suffered the most. In September, President Trump announced another round of tariffs on Chinese goods and threatened that he was ready to impose additional levies on the remaining $270 billion of goods currently imported from China should the Chinese government take retaliatory action. The Trump Administration was also able to come to agreement for a possible update to the North American Free Trade Agreement with Canada and Mexico.
Domestic economic growth has been strong, and GDP and employment numbers continue to grow. Even still, real wages have been flat as inflation is starting to eat away at nominal gains. Given that backdrop, it was not surprising to see the Federal Reserve raise rates, with another increase expected before the end of the year. Long-term rates have moved up only slowly compared to shorter-term rates and the result is an increasingly flat yield curve. Most types of bonds posted flat returns in the quarter.
Last Friday, members of Sellwood’s team spent the afternoon volunteering at Free Geek, a local nonprofit devoted to transforming technology into opportunity. By our estimation, we took apart 25 desktop computers, 10 ancient servers, and dozens of modems, reducing obsolete technology to its component parts, so that they could be responsibly recycled.
Free Geek’s mission is “to sustainably reuse technology, enable digital access, and provide education to create a community that empowers people to realize their potential.” We are proud to be part of that community.
We are a competitive bunch. If we had to declare winners of the event, they would be:
- Ruthie, for deconstructing the most computers (15);
- Charlie, for total weight recycled (hundreds of pounds); and
- Nick, for sheer volume of devices pulled apart (countless modems and power cords)
Thanks to Free Geek for hosting us.
Second Quarter 2018: Tit for Tat
Tit-for-tat trade retaliation took center stage during the second quarter. Canada levied retaliatory tariffs on wide variety of US agricultural products in response to steel and aluminum tariffs announced by the Trump administration in March. China likewise promised to retaliate along the same lines. As the quarter ended, President Trump raised the possibility of escalating the conflict with 20% tariffs on imported European automobiles, a move which EU Officials were quick to condemn.
Italian political turmoil roiled international markets as a new government raised the possibility of Italy exiting the European Union. Italian equity markets sold off sharply while bond yields rose, pushing Spanish and Portuguese yields higher, reminiscent of past European debt crises. The trade and politic turmoil pulled developed international equity prices downward in the quarter, with European financials heavily impacted. Emerging market stocks were also heavily hit. Causes ranged from NAFTA trade worries in Mexico, growth problems in Brazil, to continual political problems in Turkey.
Despite trade woes, US stocks were up across the board for the quarter, with REITs and small cap names leading the way. In a familiar refrain, growth stocks outperformed their value counterparts. Returns for growth names have been so strong that over the past ten years growth has outperformed value by over 3% annualized. However, over the past 15 years, value has provided almost 2% of outperformance above growth indices.
The US labor market continued to strengthen as employers voiced concerns about the lack of quality job applicants. However, wage growth remains elusive and consumer spending is beginning to slow. In good news for renters, there has been a large increase in multifamily inventory, slowing rent increases in major markets. The Federal Reserve raised rates in June as its primary inflation measure hit its target. In an interesting reversal, after years of hawkish positioning from Republican policy makers, Trump economic advisor Larry Kudlow warned the Federal Reserve about blunting current economic growth by raising interest rates too quickly.
First Quarter 2018: Welcome to the Job, Mr. Powell
After an unusually quiet 2017, market volatility returned in the first quarter. Strong labor and wage growth, tech stock worries, and trade war fears helped bounce equity markets up and down before ending the quarter slightly below where they started the year.
Domestically, investors fretted over a variety of new information. Increased deficit spending and rising wages raised inflation fears that sparked a selloff in Treasurys and the stock market at the end of January and into early February. In the broad-based selloff, markets fell approximately 10% from their January highs, ending a 15-month winning streak for the S&P 500. In March, President Trump raised fears of a possible trade war by unexpectedly announcing stiff tariffs on imports of steel and aluminum, making good on a key campaign promise to be tough on trade. In wake of the announcement, Gary Cohn, Trump’s top economic advisor, resigned.
Markets declined again in March, which was an especially difficult month for technology stocks. In March, it was revealed that the personal information of 50 million Facebook users was compromised without their consent, and President Trump targeted Amazon.com specifically for regulatory policy changes. Even still, growth stocks outperformed value for another quarter – the S&P 500 Growth Index returned 1.9% and the S&P 500 Value Index returned -3.6%. Smaller capitalization names also outperformed larger ones as the Russell 2000 finished the quarter down -0.1% versus -0.8% for the S&P 500. Internationally, a weaker US dollar helped support international indices as emerging markets rose 1.3%.
The yield curve flattened as new Federal Reserve Chair Jerome Powell continued with the policy normalization plan established by former Chair Janet Yellen and raised rates for the 6th time since the global financial crisis. Yields on the short-end of the curve have risen considerably since 2016, with the 2-year Treasury now yielding its highest value since August 2008. Rising rates and widening spreads pushed almost all fixed income indices lower for the quarter.