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Quarterly Market Update

It is hard to believe we are now in the third quarter of 2019.  The second quarter was a pretty good one, so let’s take a look at some of the data with my normal quarterly review.

  • The current Forward P/E and Shiller’s P/E are slightly above their respective 25-year averages.  They are 16.74 vs 16.19 for Forward and 30.23 vs 27.02 for Shiller.

  • One-year returns have historically been positive with P/E readings in this range.  Remember the old famous line of – past performance does not guarantee future results.

  • Mid Cap Growth has been the leading asset class of traditional US equities so far this year with a return of 26.1%. It also led the 2nd quarter with a return of 5.4%. Small Value has been the “slacker” this year with a return of 13.5% and 1.4% this most recent quarter.

  • Mid Cap Growth has also led all US asset classes since the market lows in 2009.  Its return has been 531.7%.  Small Value has been the laggard with returns of 376%.  I wonder what all the Dimensional Fund Advisors (DFA) would say about that now as they love small and value stocks?

  • REITs (Real Estate Investment Trusts) have led the major asset classes this year with a return of 19.3%.

  • Just a quick reminder that markets don’t always just move up throughout the year.   Despite average inter-year drops of nearly 14%, the market has ended the year up in 29 of the last 39 years.

  • We are now in the longest economic expansion at 120 months.  It has been a fast 10 years!

  • Residential Investment and Motor Vehicle Consumption continue to be below average.  Are we supposed to automatically blame Millennials?

  • Growth in Workers is always a main part of overall GDP.  Projections for Growth in Working Age Population is basically flat for the next decade.  This is due to lower domestic birth and immigration rates.  I will continue to bang the drum this may be a concern for future GDP.  We either need more people or a big spike in Real Output per Worker.

  • Unemployment rate of 3.7% is well below the 50-year average of 6.2%.  Unfortunately, the Wage rate of 3.4% is below its long-term average of 4.1%, however, it has been climbing the past couple of years.

  • The Market continues to predict the Fed will be cutting rates, with some projections of a full cut of 1% in the next year.  I’m not feeling the same way.  Remember, the market and the economy are not the same thing.

  • The “Probability of US Recession Predicted by Treasury Spread” has spiked to 33% for June 2020. The last time it was this high was the end of 2007.  This is why some analysts are saying we may already be in a recession.  I also wonder if this is why the White House has been demanding a rate cut.  Do they know something we don’t?

  •  Just a reminder about investor behavior.  A 60/40 portfolio has an annual average of 5.2% over the last 20 years while the average investor’s return has been 1.9%.