The U.S. stock market has more than tripled in value during the run-up that started in March 2009, and the most recent quarter somehow managed to accelerate the upward trend.  We have just experienced the third-best first half, in terms of U.S. market returns, of the 2000s. In the bond markets, longer-term Treasury rates haven’t budged, despite what you might have heard about the Fed tightening efforts.

By any measure, this represents a strong first half of the year, driven by the S&P 500 tech sector, biotech firms and information technology companies generally.  What is interesting is that investors appear to be flooding into these business categories because they are the ones most likely to grow their sales even if the economic environment were to turn sour—which suggests a growing bedrock of pessimism about future economic growth among seasoned investors.

There is room for hope.  The Atlanta Federal Reserve recently forecasted that the U.S. economy will grow at a 2.9% rate for the year’s third quarter.  We won’t have definitive evidence of that until sometime in October, but our fingers are crossed.  More good news: the unemployment rate is at a near-record low of 4.7%, and wages grew at a 2.9% rate in December, the best increase since 2009.  The underemployment rate, which combines the unemployment rate with part-time workers who would like to work full-time, has fallen to 9.2%–the lowest rate since 2008.

Meanwhile, the energy sector, which was a big winner last year, has dragged down returns in 2017.  This proves once again the value of diversification; just when you start to question the value of holding a certain investment, or wonder why the entire portfolio isn’t crowded into one that is outperforming, the tide turns and the rabbit becomes the hare and the hare becomes the rabbit.

There are many uncertainties to watch in the days ahead.  The U.S. Congress is still debating a health care package, and has promised to revise our corporate and individual tax codes later this year.  There’s an infrastructure package somewhere on the horizon, and perhaps a round or two of tariffs on imported goods.  Inflation often follows when the Fed raises rates, but we don’t know if or when the Fed will do that, or by how much.

Meanwhile, the run-up has lasted for longer than anybody would have expected when we came out of the gloomy period after the 2008 crisis.  Inevitably, we are moving ever closer to a period when stock prices will go down.  That day cannot be predicted in advance, but it is always good to spend a moment and ponder how much of a downturn you would be comfortable with when markets finally turn against us. On the other hand, if you’re not fearful of a downturn, then the next bear market could be a terrific buying opportunity for all of us.

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Scott Carlson