July 1 is one of my favorite days of the year. In addition to a wealth of historical milestones today (See Jason Zweig’s, ``This Day in Financial History''), and the coming July 4 holiday weekend, it also marks the start of the second half of the year. As such, it is a good time to look back to see how we got to where we are today.
We begin with the opening salvo from the economists, who when surveyed by Bloomberg at the beginning of the year, all predicted rising interest rates and falling bond prices. As Bob Farrell has admonished us so many times over the course of his career, “When all the experts and forecasts agree — something else is going to happen.” Had you ignored the dismal scientists and followed Farrell’s advice, perhaps purchasing the iShares Barclays 20+ Year Treasury Bond exchange-traded fund, your year-to-date gain would have been more than 11 percent.
Alternatively, you could have listened to the economists, and purchased the ProShares UltraPro Short 20+ Year Treasury ETF. In the first two quarters of the year, that lost more than 33 percent of its value.
So much for expert predictions of a great shift out of bonds and into stocks.
The equity side is a bit more complex. Markets rose so fast in 2013 that perhaps they got ahead of themselves. The first quarter began with a stumble, especially among those high-flying tech stocks that had done so well the year before. Since then, many of them have rallied, recovering some or all of their losses.
The Standard & Poor's 500 Index is up about 7 percent for the year. If the second-quarter pace (4.7 percent for the period) continues the rest of the year, it would result in an increase of more than 20 percent. This is, admittedly, a big “if.”
Small-cap stocks didn't do as well, rising less than 3 percent. Again, looking at 2013's scorching pace, this shouldn't be a big surprise to anyone. So far, 2014 looks like a period of digestion for 2013’s winners.
Emerging markets have only done marginally better than the small caps, up between 4 percent and 5 percent. However, their valuations are much lower than the mature markets in the U.S. or Europe. And their volatility is higher.
Sentiment remains decidedly mixed. As the second quarter began, the bulls were skittish and the bears were emboldened. Mr. Market decided to frustrate everyone. As we observed back in October 2009, this remains one of the most hated stock-market rallies in history.
Newsworthy events and problems were everywhere. First-quarter gross domestic product declined 2.9 percent. The problems in the Ukraine started and then faded; the ever-present mess in the Middle East got even messier. And all along, the market just continues to shrug off bad news and grind higher.
That helped sustain demand for initial public offerings. According to a report from Renaissance Capital, in the second quarter “proceeds were up 42.4% year-over-year. IPO proceeds in the 2Q14 were led by the European and North American regions, which accounted for 43.7% and 34.9% of quarterly proceeds, respectively.”
The market's strength also is part of the reason mergers and acquisitions have reached a seven-year high, as the New York Times reported yesterday. Much of the increase can be traced to a series of blockbuster deals, aided by the huge reserves of cash companies have accumulated since the financial crisis. “2014 has so far been the kind of year that bankers and lawyers have been awaiting for some time . . . and it appears that the factors that have been driving the waves of consolidation will keep propelling mergers for the rest of the year,” the Times reported.
Yet it still is a challenging environment. I am in the camp of Barron’s Randall Forsyth, who pithily observed, “Fade forecasts and diversify.”
Sounds like good advice to me.
To contact the author of this article: Barry Ritholtz at firstname.lastname@example.org.
To contact the editor responsible for this article: James Greiff at email@example.com.