RESOURCES

After a solid start to the year, stocks swooned in March, with the Vanguard Total Stock Maret Index fund (a good proxy for the entire US stock market) going from a positive year-to-date return of 2.4% in late January to -6.7% in late March. While a 9% negative return is common historically, in recent years such things are not supposed to happen. Not to worry, investors quickly got used to $100 oil, or decided that it just didn’t matter or wouldn’t last, and stock prices rallied again. From the end of the quarter to the date of this writing (June 4), the S&P 500 has returned about 15%.

Economist and investor John Hussman stated it well, “The defining feature of every bubble is the same: a growing inconsistency between the long-term returns that investors expect in their heads – based on extrapolation of the past, and the long-term returns that properly relate prices to likely future cash flows – based on valuations.

After a negative year-over-year change in GDP (adjusted for inflation) in the first quarter, growth rebounded strongly to 3.8% in the second quarter, which was the strongest quarter in almost two years. It’s probably appropriate to think of the first half of the year together, as some of what might have been done in the first quarter was likely pushed back into the second quarter. The average year-over-year growth for the first two quarters was 1.6%, which is weak growth, but still growth. One could reasonably conclude that uncertainty drove weakness in the last quarter of 2024 and first quarter of 2025. We will have to wait and see. Clearly, we do not have a booming economy, though.

The big topic this year has been international trade, and specifically tariffs. On “Liberation Day” when Trump rolled out tariffs on America’s trading partners, the US stock market initially crashed, expecting devastating economic contraction and inflation.

The S&P 500 gained 25% in 2024, for the second straight year of 20%+ returns. The last time it had three such years in a row was in 1878-1890. One of the greatest productivity-boosting new technologies ever came out in that period – the electric light bulb!

Based on the Shiller P/E, 99% of the return in the first half was driven by valuation increasing, and 1% by the underlying companies producing value. The 36.3x multiple is 68% above its fifty-year average, and 38% above its twenty-year average. For historical reference, prior peaks were 29.1x in September 1929, 45.5x in April 2000, and 39.6x in 12/21.