The First Half: In The Books

“December is here before it is June, my goodness how the time has flewn.” 

From: How Did it Get So Late So Soon, by Dr. Seuss

In the books….while looking for a graduation gift last week, we picked up a copy of Dr. Seuss’s classic book about life, Oh The Places You’ll Go!   Flipping through the pages we realized – wow – this book actually describes the stock market in the first half of 2018.

So in honor of this year’s graduates who received Oh The Places You’ll Go!  – and didn’t realize it was a market commentary – and because there are lessons to be learned from both the book and the markets, let us borrow from Dr. Seuss and review the first half of 2018.  How the time has flewn.

(Thanks to Penguin Random House Publishing)

January, 2018

Congratulations!
Today is your day.
You’re off to Great Places!
You’re off and away!

You’ll be on your way up!
You’ll be seeing great sights!
You’ll join the high fliers
who soar to high heights”

 From:  Oh The Places You’ll Go! By Dr. Seuss

2018 Market Commentary

The stock market soared to high heights in January…  Stocks had already risen non-stop for fifteen months by January, and the party was still rocking.  The only fear investors felt was FOMO (Fear Of Missing Out).  By the numbers:

  • The S & P 500 index rose 5.7% in January of 2018.
  • The Dow Jones Industrial Average hit eleven record highs in January, reaching an all-time peak of 26,616.71 on January 26.
  • Asia and the Emerging Markets rose sharply.
  • The only concern: bond prices dropped a bit around the world.  Foreshadowing?

Other notable stories from January:

  • The U.S. government shut down for three days. The markets neither noticed or cared.
  • Wal-Mart raised its corporate minimum wage to $11 per hour, which is $4 above the national minimum wage.
  • Janet Yellen chaired her final Fed meeting.
  • Bitcoin rose from $13,673 on January 2 to $17,163 on January 7, then fell to $10,786 by January 31. In January Bitcoin was all the talk at cocktail parties.  The bulls believed (and still do) that Bitcoin will be the currency of the future.  The bears didn’t understand what a Bitcoin even is (and still don’t).  The first Bitcoin exchange was called “Mt Gox”, which sounds a whole like something created by Dr. Seuess.

February, 2018

“I’m sorry to say so
but, sadly, it’s true
that Bang-ups
and Hang-ups
can happen to you.”
                             

From:  Oh The Places You’ll Go! By Dr. Seuss

February was a month of bang-ups.  Ironically the markets deflated because of inflation.  Employment data came in stronger than expected.  Wages rose (remember the Wal Mart minimum wage increase in January).  Bond prices continued their January slide. As a result:

  • In February investors experienced the most violent market swings since 2015.
  • On a single day, February 5, the market lost 4.6%, with the DJIA closing down a record 1175 points (after being down 1579 points intra-day!)(In February we were alarmed; today most investors barely remember it).
  • The S&P 500 index ended February down 3.7%.
  • Europe, Asia and the emerging markets fell.
  • Yields rose and U.S Treasury bonds dropped.
  • Crude oil dropped 5.4%
  • Bitcoin plummeted to a 2018 low of $6,846 on February 7, then rallied back up to $10,606.

 

March, 2018

“When you’re in a Splump
You’re not in for much fun
Un-Slumping Yourself is not Easily Done”
        

From:  Oh The Places You’ll Go! By Dr. Seuss

cleanse

March – we weren’t in for much fun… 

  • The U.S. market fell more than 2% in March, officially wiping out all the gains of 2018 up to that point (the January rally a distant memory).
  • Investors who in January felt FOMO by March began to feel FOLM (Fear of losing money).
  • A trade war with China dominated the news, with 25% tariffs projected on steel and aluminum. The trade story would whipsaw the markets for the next three months.
  • The Federal Open Market Committee – as expected – raised the Federal Funds interest rate .25%.
  • Crude oil rose 5.4%.
  • Anomaly: U.S. Steel stock dropped 26% after the steel and aluminum tariffs were announced.

We’ll pause here to look at a chart, below.   The gray shape is the stock market in the first quarter of 2017.  The turquoise line shows the first quarter of 2018.

The first quarter of last year looks like the Grand Tetons.  The first quarter of this year looks like a heart rate monitor during a cardiac event.  And that’s how it felt.

While we’re tossing around graphs, the one below compares trailing price-to-earnings ratios in March of 2018 to the historical average.

(chart courtesy of Yahoo Finance) 

March 2018

(chart courtesy of Yahoo Finance) 

A couple of conclusions from the P/E chart:

  1. Investors in March expected future earnings to grow rapidly.
  2. If those investors were disappointed, the downside would be brutal.

Speaking of brutal, in March Bitcoin closed at $6973, down 49% percent for the first quarter.

April would be the Waiting Place…for earnings.

April, 2018

The Waiting Place


“Waiting for a train to go
or a bus to come, or a plane to go
or the mail to come, or the rain to go
or the phone to ring, or the snow to snow
or waiting around for a Yes or No
or waiting for their hair to grow.
Everyone is just waiting.”

From:  Oh The Places You’ll Go! By Dr. Seuss

As the markets waited on earnings…  Traders tried to trade the Trump tariff tweets. (Say that three times?)  Fortunately, earnings were excellent:  the average earnings increase announced in April was 23%.  By the end of April:

  • The S&P 500 index was up .3% for the month. Not much, but it felt like a win.
  • Commodities were up an average of 2.6%.
  • International markets were strong.
  • The weakness in the bond market continued. Interest rates rose and bond prices fell.   The U.S. 10 year treasury yield touched 3% in April, the first time since 2014.
  • Crude oil rose 5.6%
  • Bitcoin closed at $9240
  • Anomaly: China announced strong growth in the first quarter.  Surprisingly most of the growth came from consumer spending instead of exports.

May, 2018

Somehow you’ll escape
all that waiting and staying
You’ll find the bright places
where Boom Bands are playing.

From:  Oh The Places You’ll Go! By Dr. Seuss

MAy 2018

In May U.S. stocks finally performed.  You’ve heard the old Wall Street saying:  “stocks climb a wall of worry.”  May’s worries included the never-ending tariff news, tensions with Iran, fear of inflation, fear of higher interest rates and worry about a new Italian government.

Climbing that wall of worry in May:

  • S. stocks rose 2.8%, the best month since January.
  • S. Real Estate Investment Trusts rose 3.9%
  • Commodities rose 1.4%
  • The U.S. dollar rose 2.3%.
  • Slipping down the wall were international stocks, down slightly.
  • Toys “R” Us (Corporate motto: “Some assembly required”) filed for liquidation in bankruptcy court.
  • Bitcoin dropped 19% to $7,494.17.

 June, 2018

“Oh, the places you’ll go! There is fun to be done!
There are points to be scored. There are games to be won.

From:  Oh The Places You’ll Go! By Dr. Seuss

June 2018

Points to be scored?   Not points in the Dow Jones Industrial Average, which was down .6% for the month.

But the S&P 500 index was a winner in June, up 1.1%.  That small increase feels good:  since 1950, June has traditionally been the worst month of the year during mid-term election years.  (Source: stocktradersalmanac.com).

Other market news from June:

  • The FOMC increased the Federal Funds Rate by .25%. The Fed projected two more rate increases in 2018.
  • A federal judge ruled that AT&T could proceed with an $85 billion buyout of Time Warner, paving the way for other vertical mega-media-mergers.
  • General Electric stock was removed from the Dow Jones Industrial Average. GE was the last original 1896 member of the DJIA.  Little known fact: GE has been removed from the DJIA twice before.  The stock has risen 6% since the announcement was made.
  • Bitcoin closed at $5862, the lowest close since November of 2017. Admittedly 2018 has been a rough year for Bitcoin, but the cryptocurrency bulls note that Bitcoin is still up 130% over the past twelve months, outperforming almost every other asset class.

The Score at the End of the First Half

  • The S & P 500 index was up 2.3% for the first half.
  • The DJIA was down 1.2% for the first half.
  • The so-called FAANG stocks were down in the first half. Facebook (FB) was down .97%, Apple (AAPL) down .21%, Amazon (AMZN) down .10% and Netflix (NFLX) down 1.01%.  The only FAANG with a positive return was Google’s parent Alphabet (GOOGL), up .21%.
  • Volatility jumped 40% in the first half of 2018.

The Second Half?

In the second half investors may be rewarded for proper diversification and balance.   Which leads us to perhaps the best investment advice of all from Oh, The Places You’ll Go!:

“So be sure when you step.
Step with care and great tact
and remember that Life’s
a Great Balancing Act.

Kid, you’ll move mountains!”

From:  Oh The Places You’ll Go! By Dr. Seuss

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