Wednesday, July 12, 2017


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Congress appears to be stuck in its attempts to make changes to the Affordable Care Act, as well as its attempts to make significant changes to the income tax code.  In spite of that, the public markets, both at home and abroad, turned in a very solid first half.  In fact, some investment sectors turned in their best first half performance since 2013, and in a couple of cases, since 2009.

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Looking at representative domestic stock indices for the first half of 2017, we find the S&P 500 up 9.34%, the S&P MidCap 400 up 5.99%, the Russell 2000, a broad small company index, up 4.99%, the Dow Jones Industrials up 9.35%, and the NASDAQ Composite up 14.07%.

Exploring subsets of these numbers, we find that growth stocks materially outperformed value stocks, regardless of market capitalization.  Domestic large growth was up 15.78%, domestic large value was up 2.98%.  In MidCaps, growth was up 13.13%, while value was up 3.46%, and on the small cap front, growth was up 11.64%, while value was down 0.52%. Evaluating sectors, we find that healthcare and technology led the first half, up 16.61% and 16.94% respectively, while energy was off, down 13.68%.

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On the international front, the MSCI EAFE (Europe, Australia, Far East) Index was up 13.81%, while the MSCI Emerging Markets Index (ex-Japan) was up 21.83% for the first six months.  Malaysia, Hong Kong, and India’s Sensex had especially good runs, with each of them up between 16% and 20%.

Turning our attention to bonds, we find that U.S. short term corporate bonds were up 1.68%, intermediate bonds were up 3.23%, and long bonds were up 5.76%.  Government issues also had a good first half, with short term bonds up 0.61%, intermediate bonds up 1.68%, and long bonds up 4.43%.

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Turning to economic data, we see that GDP growth for the first quarter, according to the Bureau of Economic Analysis (BEA), was 1.4%.  Consumer spending was off sharply during the first quarter, and the personal savings rate increased to 5.1% of disposable income.  Consumer confidence remains high, causing consternation among some economists, who assume a high correlation between consumer confidence and consumer spending.

It’s our thought that consumer confidence remaining high is a reflection of household preparedness for economic change.  Households are preparing for economic upheaval by continuing to increase savings, continuing to reduce debt, and choosing to make solid choices when it comes to discretionary spending.  We certainly hope that’s what’s going on.  That’s what we see, though we do live in something of a bubble.

The Federal Reserve announced that all 34 of the banks it checks annually for financial soundness passed its “stress test”.  The report also noted that the ten largest American banks hold 80% of all banking assets.

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As we move into the second half of 2017, remember that the only certainty we have is uncertainty, and that we are more than eight years into a bull market.  We have found that disciplined financial behavior gives each of us the freedom to ignore market swings and volatility.  That disciplined behavior shows up in the habits of spending less than we make, always having a reserve, avoiding debt, making and executing on long term plans, and being generous with our time, talent, and treasure.

Last week, we celebrated Independence Day, what is often referred to as July 4th.  This is the day we celebrate the signing of the Declaration of Independence.  With the celebration almost a week behind us, let me encourage you to remember that independence calls for self-governance, and that the price of the freedom, embedded in the concept of independence, is very high.

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There are men and women, from Valley Forge to the Delaware River, from Tripoli to Tunis, from Gettysburg to Antietam, from the Battle of the Somme to the Western Front, from Pearl Harbor to Auschwitz to Iwo Jima, from the DMZ to Inchon, from Hamburger Hill to Saigon to the Tet Offensive, from Stormin Norman to Desert Storm, who have willingly put themselves in harm’s way, so we can enjoy our independence, and celebrate these precious freedoms.

Quote of the week:

“America was not built on fear.  America was built on courage, on imagination, on an unbeatable determination to do the job at hand.”
                           Harry S. Truman