The stock market rebounded in May, with year-to-date losses at the end of April swinging to gains by the end of May. Specifically beneficial to our investment strategy, U.S. mid-caps and small caps have provided superior returns in May and 2018 year to date.
Here are some specific returns:
Index May 2018
S&P 500 Large Caps +2.41% +2.02%
S&P 400 Mid-Caps +4.13% +3.05%
S&P 600 Small Caps +6.46% +8.17%
Growth-style stocks have significantly outperformed the value-style stocks that we emphasize. As of May 31, S&P 500 growth-style stocks are up 6.63%, vs. S&P 500 value-style stocks being down 2.84% or a spread of almost 10% in just five months of the year. Academic research has identified value-style stocks as having higher returns over the long term, and this is one pendulum that can swing quickly and strongly.
Positive economic reports were published in May, specifically strong employment growth leading to the lowest unemployment rate we have seen in several years. A flip side to low unemployment is the need to raise wages to recruit and retain workers. Higher wages may lead to lower corporate profitability and higher inflation, but overall the outlook for general economic growth is positive.
Looking forward, the price-to-earnings ratio for U.S. stocks is moderately high, indicating more modest returns in the future. Conversely, international stocks, which have not had strong returns, have a lower price-to-earnings ratio and, therefore, higher expected returns in the future.
This points to an important lesson in investments: The best-performing investments in the near future may be the ones that have done poorly in the recent past. Successful investing often requires one to be a contrarian.
Last month we wrote about bonds. The Federal Reserve will meet June 12 to 13, and there is a high probability that short-term interest rates will be increased by 0.25%. In general, slow and gradual increases in interest rates will be good for savers and long-term investors (like you) but harmful to borrowers. Keep your ears tuned on June 13!
Summertime can be the best season for family time. Do your best to spend your time making great family memories this summer. Despite all that we talk and write about in terms of financial planning, the best legacy is the memories that come from personal experiences. Plan ahead and be spontaneous and enjoy your summertime!
As always, please contact us with any questions, news, or comments.