It’s hard to make sense of a market that took us through a painful decline at the end of last year, followed by an abrupt and unexpected recovery at the beginning of this year. The first quarter of this year gave us the biggest one-quarter gain since 2009. Then, the trend continued through the second quarter with more modest gains. This was despite warnings about an overdue recession, challenges to the economy, and trade wars. Investors are grinning at the strong performance, but behind their backs, they have their fingers crossed.
THE GOOD NEWS
The good news is that just about every investment asset produced gains in 2019’s second quarter. The Wilshire 5000 Total Market Index—the broadest measure of U.S. stocks—rose 3.99% in the most recent three months, and now stands at an 18.66% gain for the year.¹ The comparable Russell 3000 index is up 18.71% so far this year.²
Looking at large cap stocks, the Wilshire U.S. Large Cap index gained 4.19% in the second quarter, closing out the first half of the year with a gain of 18.74%. The widely quoted S&P 500 index of large company stocks was up 3.79% in the second three months of the year, and is up 17.35% in the first half of 2019.³
As measured by the Wilshire U.S. Small-Cap index, investors in smaller companies gained 2.03% in the second quarter, and are up 17.85% so far this year. The technology-heavy Nasdaq Composite Index gained 4.40% in the second three months of the year, and is up 20.66% at the year’s half-way point.⁴
International investors are also sitting on gains. The broad-based EAFE index of companies in developed foreign economies gained 2.50% in the second quarter, and is up 11.77% so far this year. ⁵
Real estate, as measured by the Wilshire U.S. REIT index, posted a 1.63% gain during the year’s second quarter, for a 17.92% gain for the first six months of the year. The S&P GUCCI index, which measures commodities returns, lost 1.42% in the second quarter, but is still up 13.34% for the year. Energy prices are up 22.80% in 2019, while precious metals have gained 8.86% so far this year.⁶
THE BAD NEWS
The bad news is that just about every investment asset produced gains in 2019’s second quarter. Why is that bad? Normally, investors want to buy low and sell high, but when every asset class is doing well, it’s hard to decide what to buy and what to sell.
Having a globally diversified portfolio and a financial advisor that does regular, quarterly rebalancing can solve this dilemma. Every 3 months, your advisor will look at the performance of each asset class in your portfolio. When one of your 15 asset classes goes up more than 4% in a quarter, it’s an indication to sell a little while it’s at a peak, and put the proceeds into another asset class that is a bargain at the time. When you use the discipline of quarterly rebalancing, it takes emotion out of the decision-making.
You might expect that strong performance in the first half of the year would be followed by a correction or decline in the second half. However, that hasn’t been the case historically. Over the 120-year history of the Dow Jones Industrial Average, the Dow has risen 66.4% of the time from July through December. If the Dow did well in the first half of the year, the odds of a positive second half were even better, at 72%.⁷
The challenge is unpredictability. Recently, the U.S. and China called a cease-fire in their yearlong trade war, but we know that’s not the end of the war. As we approach the November elections, partisan clashes can affect the market. And there’s always the fallout from misguided policy decisions, as we saw with the government shutdown last December. Be prepared for surprise.
A balanced, broadly diversified portfolio can help. Not having all your eggs in one basket can capture market returns, while reducing volatility, and providing more downside protection in the event of a market correction.
¹ Wilshire index data: https://www.wilshire.com/indexcalculator/index.html
² Russell index data: http://www.ftse.com/products/indices/russell-us
³ S&P index data: http://www.standardandpoors.com/indices/sp-500/en/us/?indexId=spusa-500-usduf–p-us-l–
⁵ International indices: https://www.msci.com/end-of-day-data-search
⁶ Commodities index data: http://us.spindices.com/index-family/commodities/sp-gsci