Happy 4th of July
The halfway point of the year has been reached and all the questions that were asked at the turn of the year have not really changed nor been answered. For example, the Fed tapering program had just started and many wondered if the reduction in bond buying would have a negative impact on the markets. So far, the answer is no, and more surprisingly, the bond market has rallied. The rumblings from Russia have turned into a full-blown power grab that has made it to the back page in favor of Middle East unrest. The polar vortex is still chatted about in the heat of summer, but so far those impacts seem to be restricted to the first quarter. What lies ahead as the second half gets started this week? The holiday shortened week has plenty of data to mull over under the rockets’ red glare, including the employment report, manufacturing data and construction spending. Add to the mix some Fed stump speeches and there will be plenty to keep everyone glued to the markets at least through noon on Thursday. Within the jobs data should be a picture of improving wage growth. Combined with likely better than 200,000 in new jobs, the healthy job markets may be enough to give the Fed some fodder to consider higher rates sooner than later at their next meeting.
Little has really changed within the markets, as investors still favor stocks vs. bonds (if only slightly) and market declines are ultimately met with more buying. Sentiment readings still show a very bullish investor population (which is not good for stocks over time) and valuations remain at relatively high levels. Although valuations are well below the nosebleed levels of 2000, they are toward the high end of historical ranges. The market has been ripe for a correction for quite some time; however the tripping event has yet to develop. Invariably, the question gets asked, “what could make stocks go down?” Quite simply it is something that will change investors mind about the future growth of the economy or a change in the direction of interest rates. Higher rates have been discussed for over a year, starting with the Fed tapering program, but have yet to materialize in the markets. Investors remain comfortable with corporate buybacks and modest economic growth and see the very poor first quarter GDP report as strictly weather related. The slow, hot summer days have arrived at Wall Street. Don’t expect much to change until the benign economic assumptions embedded in the buyers psyche gets rattled by an event that is not likely to just pass in the night. If we only knew….
Bonds rallied across the curve, as short rates declined along with 10 year bonds, pushing the bond model back into buy territory from its one week stint in negative ground. Inflation readings, as reported by the government have indeed picked up however they don’t seem to be having an impact upon the most visible price – gasoline. It is the summer ritual to complain about higher pump prices, without looking at the history of pricing. Today’s prices are equal or lower than each of the past three years. Historically, prices peak not in the summer driving season, but in the April/May period. This year does look different in that we have yet to see a peak in prices. A shift worth watching as the summer unfolds.
Sunbathing excitement comes when it is time to turn over before a return to snoozing. The equity markets have been snoozing as well, with bouts of short-term excitement only to turn over and fallback asleep. Little movement in the industry groups and the major asset class rankings only reinforce the sleepiness of the daily markets. The industry groups have been stuck over the past three weeks and only modest changes since early May. Save for two weeks, all the seven major asset classes remain above their long-term averages, which hasn’t been seen since late 2010. That period ushered in a good six month period for stocks before the last “major” decline at the end of 2011. The fact that bonds are doing well alongside stocks is unusual in that bond “good” performance periods usually come at the expense of stocks. Ultimately that may be the case, but that could happen in the fall, when the usual “scary” period begins for stocks. If all stays as it is into fall, the energy sector will have led the markets for 5-6 months, the historical length of the past two periods for energy before a market correction. So the summer may indeed be a great time to just chill along with the markets, before the changing season in the fall.
Watching stocks has been like watching grass grow during the summer. There remains little within the markets that are showing much more than modest declines and a resumption to still higher prices in the weeks ahead. Of course, something from left field could change that, but it is hard to plan for events that may not occur. Bond investor can be cool by the water’s edge as well as no changes in “official” rate policies are expected through the end of this year.
The opinions expressed in the Investment Newsletter are those of the author and are based upon information that is believed to be accurate and reliable, but are opinions and do not constitute a guarantee of present or future financial market conditions.