If all that you paid attention to in the first half of 2013 was the sturm und drang that investors experienced during the month of June, you’d never realize that we just wrapped up a six-month return of 12.6 percent for the S&P 500. That makes the first half of 2013 the best start to a year since 1998. And it’s three times the average first-half gain witnessed in all calendar years since 1945, according to Sam Stovall, chief equity strategist at S&P Capital IQ.
Over the course of the first six months of 2013, Birinyi & Associates points out, the rise of the S&P 500 alone created some $1.66 trillion of new wealth. Really. No wonder that consumer confidence is climbing.
The hard part, for most of us, will be reconciling what happened in June with what happened during the prior five months of the year. As Federal Reserve policymakers signaled a coming end to monetary stimulus, it seems as if investors took fright and scurried off to the sidelines to wait out what they seem to believe will be a Category 5 hurricane in the financial markets.
S&P 500 Sectors for the First Half of 2013
Sources: S&P Dow Jones Indices
Of course, the Fed’s “tapering” will have major implications for the financial markets, and especially for bond markets, where risk premiums on many kinds of securities don’t come close to measuring up to reality. But what investors appear to be forgetting amidst all the hullabaloo is that there can be “good” reasons behind higher interest rates and “bad” reasons. If interest rates spike higher out of a fear of default, or deteriorating fundamentals, that’s clearly a bad scenario. But if they are rising because a risk-free rate that falls below the inflation rate no longer reflects the reality of a reasonably healthy economy, well, that’s something else. And that seems to be what we are seeing right now.
About the only asset that has done well since late May, when Fed Chairman Ben Bernanke dropped the first clear hints that the era of cheap money would soon be ending, is the U.S. dollar. The Merrill Lynch corporate bond index is down 2.9 percent since that date while its global index of high yield bonds is down 3.9 percent; the universe of emerging markets stocks has lost 8.7 percent. Gold is down 12.3 percent.
Even housing stocks, in spite of data that suggests the sector is still robust, have been hit with outsize losses. PulteGroup (NYSE: PHM), for instance, is down 14.1 percent since Bernanke’s May speech, while Lennar (NYSE: LEN) is off 14.8 percent.
What this seems to indicate is that the selling over the last six weeks or so comes down to profit-taking, pure and simple. Think back to the comments you heard over the first five months of 2013: “this can’t continue”; “get ready for a correction”; “the market can’t sustain this kind of advance for long.” And yet the rally continued one week after another.
Investors became more anxious with every month that left them sitting on larger gains. That proverbial wall of worry loomed large. It is almost as if the pressure that had built up in the market’s psychology needed to find a way to escape – and indeed it did. The month of June was notable not just for the overall market declines but also for the fact that Apple shares continued to decline and finally dipped below the $400 a share level, representing a 7.7 percent drag on the S&P 500.
But companies like Microsoft, Google, Berkshire Hathaway, JPMorgan Chase and Cisco more than compensated for that decline. And stocks that had been languishing in the doldrums – Best Buy, Netflix, Hewlett Packard, AMD – took on a new life, with the first two seeing their stock prices more than double in the first six months of 2013.
If you want to spend the first day or week of the second half of 2013 taking stock, that’s probably a wise thing to do. It might be even smarter to keep one eye on the economic data that will come out in the next few weeks, and the other on the prices of stocks that you believe have strong fundamentals and whose shares have been buffeted by some of the recent selling. Odds are that strong data might be followed with more speeches by Fed policymakers about “tapering off,” and that those speeches will lead to more market mini-shocks – which, in turn, may well create buying opportunities for those prepared to meet them.
It’s no accident that some of the best performing mutual funds so far this year are managed by veteran value investors like Legg Mason’s Bill Miller. It’s not an easy discipline to learn – especially since our instinct is to chase growth, up until the moment when everything goes terribly wrong – but it may be worth your time and effort this year. We may end the year higher still – Stovall reminds us that when the S&P 500 rose during the first six months of a year, it has gained an average of 5.4 percent in the second half, and whenever that first half increase was more than 10 percent, the second-half advance added another 7.5 percent, on average.
If the positive momentum returns, the rising tide may, as the cliché has it, lift all boats. If the second half is more of a struggle, then it’s better to own stocks whose full value isn’t reflected in their share price.