If we could pare off the last week of the quarter, Dimensional Fund Advisors’ charts and graphs depicting second quarter market performance would have resembled an ambitious mountain of mostly positive stock returns.
Then came the June 23 Brexit vote. The surprise (slim) majority who favored exiting the EU left our would-be solid quarter with a gaping “mouth” at the end as it bounced down, and then quickly back upward. (See page 4 in the attached report.)
Here and abroad, time will tell how the Brexit vote impacts economies over the long haul. The same can be said about our wild-card presidential election closer to home. Let’s explore the most pertinent question on the theme of these and other economic influencers: What do they mean to your future expected market returns? The final page in Dimensional’s report covers this very subject as it presents “GDP Growth and Equity Returns.”
A country’s Gross Domestic Product (GDP) is a key indicator of its economic health. As Dimensional observes, U.S. GDP growth has been sluggish lately: “According to the advance GDP estimate released by the Bureau of Economic Analysis (BEA) on April 28, annualized real US GDP growth was 0.5% in the first quarter of 2016 – below the historical average of 3.2%.”
But is this economic indicator a useful predictor of future expected investment returns? Should investors assume an offensive or defensive position in response to the news?
Dimensional analyzed the relation between low GDP growth and subsequent S&P 500 Index returns from 1948–2016, and concluded (emphasis ours): “When quarterly GDP growth was in the lowest quartile of historical observations, the average S&P 500 return in the subsequent quarter was 3.2%, which is similar to the historical average for all quarters. This data suggests there is little evidence that low quarterly GDP growth is associated with short-term stock returns above or below returns in other periods.”
Whether it’s a lackluster GDP, economic surprises from abroad or suspenseful elections here at home, these and countless other economic influences combine to contribute to market pricing and returns. But because the mixed-bag outcomes are only known in hindsight, sage investors position their portfolios in advance of the news – and then stay put as the daily surprises unfold.
Open PDF: Dimensional’s Quarterly Review, Q2, 2016
SAGE Serendipity: If you see a gaggle of kids (or even older gamers) hanging around outside your house or town sidewalks with their phones in hand, wandering seemingly aimlessly, they are probably hunting a virtual Pokemon. Pokemon Go, released this week, is the latest mobile game craze out there and it’s huge. Because of the nostalgia effect both kids and their parents are playing. Here’s a Quartz.com article and Vox video that will catch you up on the phenom, as well as the stock bump for Nintendo.