About three months after the Brexit scare and nine months after the most recent Fed rate hike, the markets once again confounded the instincts of nervous investors. Markets have gone up instead of down with emerging market equities doing far better than any other asset class.
See the table below for performance on common market indices.
On the bond side, the interest rate story is essentially unchanged: rates are still low and have trended downward over the last year. This again has been contrary to most ‘experts’ who have been expecting significant rate rises for more than half a decade now. 10-year U.S. government bonds are currently yielding 1.59%; 2.32% for a 30-year bond.
Commodities, as measured by the S&P GSCI index, lost 4.15% of their value in the third quarter, but are still sitting on gains of 5.30% for the year so far, largely due to the rebound in energy prices.
A deeper look at the U.S. economy suggests that the economic picture is not nearly as gloomy as it is sometimes reported in the press.
- Economic growth for the second quarter has been revised upwards from 1.1% to 1.4%, due to higher corporate spending in general and increasing corporate investments in research and development specifically.
- Average hourly earnings for American workers have risen 2.4% so far this year.
- Consumer spending, which makes up more than two-thirds of U.S. economic activity, rose a robust 4.3% for the quarter, perhaps partly due to higher take-home wages this year.
- America’s trade deficit shrank in August.
Economists at the Federal Reserve Bank of Cleveland have pegged the chances of a recession this time next year at a low 11.25%. They predict GDP growth of 1.5% for this election year, which, while below targets, is comfortably ahead of the negative numbers that would signal an economic downturn.
The U.S. returns have been so good for so long that many investors are wondering: why are we bothering with foreign stocks? A recent Forbes column suggested the answer: historically, since 1970, domestic stocks have outperformed international stocks almost exactly 50% of the time. The long trend we have become accustomed to could reverse itself at any time.
Nobody would dispute that the economic statistics are weak tea leaves for trying to predict the market’s next move, and it is certainly possible that the U.S. and global economy are weaker than they appear. Nevertheless, the slow, steady growth we have experienced since 2008 is showing no visible signs of ending, and it is hard to find the usual euphoria and reckless investing that normally accompanies a market top and subsequent collapse of share prices. At the current pace, we might look back on 2016 as another pretty good year to be invested, which is really all we ask for.
To Your Prosperity,
Kevin Kroskey, CFP®, MBA
True Wealth Design, LLC
This article adapted with permission from BobVeres.com.
Commodities index data: http://us.spindices.com/index-family/commodities/sp-gsci
Treasury market rates: http://www.bloomberg.com/markets/rates-bonds/government-bonds/us/
Aggregate corporate bond rates: http://www.bloomberg.com/markets/rates-bonds/corporate-bonds/