9/28 Weekly Update
by Zach Marsh on Sep 28, 2018
S&P 500 -0.32%
10 Year Treasury +0.14%
Market Update: 3rd Quarter Market Recap
The 3rd Quarter went out with a bit of a whimper this week. The S&P 500 was down slightly, after posting a substantial 7,.25% gain for the quarter. The Russell 2000 small-cap index was up nearly 3.25%, despite being down over 2.5% from its August highs. Stocks remain very much en vogue and may well continue their ascent through the end of the year. With the booming economy and rising markets, interest rates continue to climb as well. How much longer the equity market can continue to climb in the face of rising rates is a question that we may well be asking in earnest next year.
Currently, the yield on MUB, a municipal bond ETF consisting of high grade muni’s, is up to 2.34%. While that is a tax-free rate of return, it only moderately surpasses the current inflation rate. It is always an interesting dilemma determining the impact of rates and the attractiveness of bonds to equities. At any precise moment in time bonds never appear attractive to stocks. For example at the beginning of 2000 the average rate on a 5 year US Treasury Bond was 6.58%. By today’s standards that seems extremely compelling, but inflation was hovering near 3% at the time, the S&P 500 was up over 14% the year prior, and the Nasdaq 100 index was up over 100% in 1999. Given the other opportunities to make money, the 6.58% treasury seemed like a sucker’s bet. Fast forward 5 years, and the 6.58% treasury bond was the best bet of the 3 options. The S&P 500 total return between 2000-2004 was -12%, while the Nasdaq 100 was down an incredible -56.25%.
The same story can be laid out in 2007 with 5 year bonds yielding 4.75%. At the end of 2006 the housing market was still booming. The S&P was up 15.61%, and the tech heavy Nasdaq 100 had risen over 115% from their lows in September 2002. Five years later the S&P 500 was down -6.32% from its January 2007 levels, and the Nasdaq’s returns only just matched the return on a 5 year Treasury bond, with a lot more heartache.
This is not to say that we now sit at the same precipice. Predicting the end of the market’s run sometimes seems like a game played by charlatan’s; you say it enough eventually you’ll be right. This is just a reminder that good times don’t last forever, and long term asset trends are very challenging to guess.
Thanks for reading,
Zach and Dave
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