July 10, 2019
With all of the talk of tariffs and trade wars, the large-cap stock index – as represented by the S&P 500 – and the small-cap index – as represented by the Russell 2000 – were both up during the second quarter 3.43% and 7.75%, respectively. International is still taking it on the chin through all of the trade discussions – the MSCI EAFE index was down 1.24% during quarter two. With our bond funds flat for the quarter, most client portfolios will be breakeven for their year-to-date total return.
After a strong 2017, but still deeply discounted when compared to the US stock market, I thought the overseas stock markets would outperform the US market heading into 2018. After a rough first six months and with all of the recent trade war talk, I have decided to drop our overseas investments to 25% of our equity exposure from about 28%. While not a huge deal, I can’t help but think overseas stocks will be impacted to a greater extent than the U.S. should trade negotiations continue to falter.
As I have emphasized in previous letters, corporate earnings need to remain strong and so far they have. The forward price/earnings ratio for the S&P 500 is actually lower today than it was one year ago. As earnings (the denominator in the P/E ratio) increase – as they have this year – while the price (numerator) stays flat, the overall ratio decreases which would mean stocks are less expensive. The lower the P/E ratio, the cheaper the stock(s). In their April 30th semiannual report to shareholders, the PRIMECAP team mentioned that the “S&P 500 trades at a forward price/earnings multiple roughly in line with its 25-year historical average (16.1x).” As the economy continues to chug along and with the corporate tax cuts boosting earnings, stocks are looking a little better than one would think after the run-up we have experienced over the past several years.
I have also checked your fixed income allocation to make sure we are approximately 50% short-term and 50% intermediate-term bonds. The intermediate bonds were hit a little harder in the first half of the year than our short-term bonds and in many of your portfolios I wanted to add PIMCO Low Duration Income (PFIIX) – the short-term, higher quality version of PIMCO Income fund (PIMIX), which has had a tremendous track record.
Hang in there with all of this tariff talk. While I am not a fan of tariffs, the argument goes that threatening with tariffs will place the US in a better position when it comes to trade negotiations. Time will tell as to any potential long-term damage done to our trading partners.
If you have not stopped in to see us lately, please do not hesitate to contact me to schedule an appointment. Enclosed you will find your Portfolio Holdings, Performance Analysis and Position Performance reports as of June 30, and a quarterly Account Management Fee Statement. Please call us should you desire the most recent copy of our Form ADV Part 2A. In addition, do not forget to notify us should your investment objectives or personal financial situation change.
Enjoy the rest of your summer!
Best regards,
Bill