Financial markets worldwide ended the first six months of the year much better off than they started. Here in the U.S., the Dow and the S&P 500 Indexes both gained 8%, while NASDAQ delivered 15%.
The Russell 2000, the small cap index, underperformed (up 4%) and the Transports gained 5%. All-in-all, it paid to be in large-cap, especially the large cap growth sector for the first half. At the same time, the Volatility Index continued to make new lows, despite the fact that at least half the investing population was/is worried and fearful of our new president’s agenda.
All of the top 20 economies around the world are growing this year. That recovery is broadening out to include emerging markets as well. It’s the best global growth investors have experienced in five years. And economic forecasts have continued to indicate gains, especially in Europe. While over in Asia, recession-ridden Japan has managed to gain ground (up 8%). Their economy is stronger than at any time in the last ten years.
As a result, international developed markets outperformed our own stock market. The French market gained 15%, Germany 16%, while Spain and Italy also gained by double digits. Emerging markets have done even better, racking up a 17% gain. Individual countries like Hong Kong were up 16%, while China lagged (only up 12%). Most investors do not realize that the decline in the dollar since the beginning of the year had a lot to do with that overseas performance.
As the greenback fell, the foreign currency-denominated stock prices overseas gained. Just this currency effect alone boosted foreign returns by 5% or more. If you subtract out the currency impact, foreign stocks actually lagged their U.S. counterparts, despite stronger economic growth. All of this was especially impressive given the political climate, as well as the changes in monetary policy here at home.
For years, investors have been concerned with what might happen to the stock market once the easy money policies of our central bank ended. Dire predictions of major declines caused by Fed tightening have not come true. Given that we have weathered three rate hikes since December and stocks are at or near record highs, says volumes about those overblown fears.
Two variables have saved the market from those bearish predictions. The economy and employment are both gaining with the jobless rate hitting historical lows over the last six months. Low foreign interest rates have also kept a lid on rising rates here at home. Believe it or not, even at these low rates, foreigners are buying our bonds because interest rates and bond yields are much lower in their own countries.
But what about all this crazy partisan politics, tweets and the like, why hasn’t this political turmoil decimated the markets as so many expected? Well, I come to discover (thanks to work done by Ned Davis Research, the Fed and Liz Ann Sonders, Charles Schwab’s equity strategist), that “stocks rise faster when partisan conflict has been elevated on an absolute basis and relative to the recent past.” There have been times since 1984 when the S&P 500 Index has made gains of 17% annually under these circumstances.
It simply proves that stocks do climb a wall of worry. But what is in store for us in the second half of the year? It appears that as long as the same set of circumstances prevails, we should have another strong year in the stock market. Let’s hope they do.