With that said, lets take a look at a performance map from the first half. A great resource that does this in a concise manner is finviz. Below are some observations:
- US markets are the clear leader versus international developed markets.
- US small caps outperforming large caps.
- Emerging markets are lagging with Brazil and China dragging on performance.
- Fixed income has not been a safe haven to park cash.
- Commodities are a mixed bag with oil leading the pack higher.
- US dollar is the strongest developed currency.
- Volatility has perked up versus last years doldrums.
- Retail, biotech, technology, and oil and gas producers are the first half winners.
- Industrials, consumer staples, and financials are the first half losers.
One area of weakness that has piqued our interest and something we'll continue to monitor is the action in the Dow and NYSE index. Both indices have been the worst performers of the 5 major US domestic indices as they both have produced losses for the first half. Both are sitting on trend-line support that goes back 2 years. If these levels break it could warrant further downside especially as we enter the heart of the summer doldrums as liquidity dries up and can generate erratic price action.
When we drill down to sectors there are clearly some surprises that pundits didn't see coming at the beginning of the year. Most forecasts saw rising rates bullish for banks and financials. However, instead of a steeping yield curve it has narrowed putting pressure on the banking sector. The one bright spot has been regional banks within financials. Tech remains one of the leaders but maybe the biggest shock year-to-date is the emergence of retail as a leadership group. Most talking heads had brick and mortar left for dead as Amazon takes over the world. One interesting trend we follow is the ratio chart comparing high beta to low volatility. High beta stocks have been outperforming since 2016. However, momentum has been sucked out of high beta names over the last few weeks as this ratio is testing the lower trend-line. Are we about to see a rotation into more stable lower volatility names? This is definitely worth watching.
Going further into the micro level if we look at what July has to offer from a historical perspective there is not much to gain. July ranks right in the middle of the pack for average monthly gains over the last 20 years as it manages to eke out a small profit of 0.37%. The daily monthly trend shows that gains peak in the middle of month and fade towards the end of the month. One bit of good news from a contrarian perspective is sentiment remains very low as expectations have drastically come in the last few months.
The first half of 2018 certainly felt different than the easy trading environment of last year. As the markets continue to find its footing there are some pitfalls and themes over the next 6 months that could heighten volatility. These include:
- Geopolitics
- November elections
- Trade and tariffs
- Italy's political challenges and banking system
- Fed and rate increases
- China's devaluation
- Valuations, debts, and deficits
Have a wonderful and safe 4th of July!
