Though we have seen the markets generally move sideways this year, economic growth has surged in 2018. This is mostly due to an increase in fiscal stimulus. It is believed the tax cuts have added to both consumer and business spending.
We are experiencing the 2nd longest economic expansion in history at 9 years (108 months), though total cumulative real GDP growth has been less than half of the longest expansion on record, which began in 1990. The average length of an expansion is 47 months and the average length of a recession is 15 months to put it into perspective.
Dividend yields are growing, currently at 2.1% versus 1.8% at the previous peak in October 2007. Earnings per share (EPS) for the S&P 500 grew 26.7% year-over-year. Of this growth, 16.6% is due to profit margins, 9.3% is due to revenues, and only 0.8% is due to share buybacks. We expect share buybacks to continue, which is good for investors.
The unemployment rate fell to 3.75% in May, the lowest rate reported for any single month since December of 1969. There is concern that finding qualified workers may begin impacting growth in the coming years, but it is not expected to have an impact this year, as productivity is increasing. The low unemployment rate is finally pushing wages to grow. Wage growth was 2.8% in May. The 50-year average for wage growth has been 4.1%, though it has hovered at or below that level since the early 1980’s. Inflation has remained low for quite some time. It is now increasing and has surpassed the Fed’s target of 2%.
The Fed has increased interest rates twice in 2018 and is expected to increase two more times this year and three in 2019. This has had more of an impact on short-term rates than long-term rates. In Q2 we saw the 1-year Treasury bill and 2-year Treasury bill yields climbed by 0.24% and 0.25%, whereas the 10-year T-note increased 0.11% and the 30-year Treasury bond yield climbed rose only 0.01%.
International markets saw negative returns last quarter. This was enhanced by the strengthening of the dollar. International funds are converted to US dollars. When the dollar is weak, this strengthens their local returns, as we saw in 2017 when international returns exceeded US returns. The US dollar strengthened this year, causing international returns to be 2% to 4% less than their actual returns in local currency.
For more details see the Q2 Market Review slides on our website.
Information compiled in this Market Commentary obtained from JP Morgan Asset Management’s Guide to the Markets and Dimensional Fund Advisors’ Q2 Market Review.
