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So far in 2015 the large-cap portion of the U.S. stock market has traded in a relatively narrow--and rather symmetrical--band. The widely followed S&P 500 Index was up only about 0.2% for the first half of the year, with a high for the year of +3.7% and a low of –3.8%. These returns are without dividends, which would add about 1.0% to the S&P returns. Incidentally, all of these calculations also pre-date the most recent Greek debt-related fallout and NYSE trading disruptions on July 8th.
According to a market analysis group cited in Barron’s, that is the narrowest first half trading range in the history of the Index. Moreover, there have only been three years--1952, 1993 and 2004--during which the Index had not been up or down by at least five percent at some point in the first six months.
As is often the case, the market sectors that were laggards last year have outperformed this year. Small-cap U.S. stocks, as measured by the Russell 2000 Index, lagged the S&P 500 last year by more than eight percentage points, but this year the small-caps are beating the S&P by about four percent. Similarly, foreign stocks, as measured by the MSCI EAFE Index, which were down 6.3% last year, are up about 3.8% so far in 2015. Emerging market stocks have been about flat for the year so far.
On the whole, the bond market has been soft over the first half of the year as investors wait for the Federal Reserve to raise interest rates. The Barclays U.S. Aggregate Index, which measures a mix of government and corporate bonds, is down 0.1% for the year to date. High yield bonds have fared better than we expected so far, gaining 2.5% as measured by the BofA Merrill Lynch High Yield Index. It is worth noting, however, that in 2014 high yield bonds had a good first half but gave back most of their gains in the second half.
So, where do we go from here? In the January issue, we predicted that the S&P 500 would gain four percent for the full year (read the full article free of charge here); and we don’t see any reason to change that forecast now. While the stock market is likely to remain uninspiring for the rest of the year, to us it still looks like the best game in town. High quality bonds could be volatile when the Fed finally does raise rates.
As discussed in the most recent issue of The Turnaround Letter, we expect to see more defaults in the high yield bond universe, which is likely to hurt returns in that asset class. The stock market’s narrow trading band may have sapped the enthusiasm from some investors, but given the lack of alternative places to invest right now, we think there will be enough demand to push stocks a little higher from here. In addition, we expect the economy and corporate earnings to remain relatively strong for the next several quarters.