Despite a spike in volatility, markets were still able to eke out gains last week. Friday also marked the end of the month and the end of the second quarter; though June ended in the red, equities closed out the second quarter in the black. This marks the third positive quarter in the last four. So far this year, the Dow has surged more than 13%, while the S&P 500 and Nasdaq have increased nearly 13% each. For the quarter, the Dow gained 2.27%, the S&P 500 climbed 2.35%, and the Nasdaq rose 4.15%.[i]
Although the quarter was a positive one in terms of economic data, markets were spooked by the news that the Fed will soon begin to cut back on their easy money policies. Despite the volatility surrounding Fed policy (which isn’t going away any time soon), the underlying economic fundamentals remain positive, and we believe that stocks are still attractive as part of a balanced portfolio.
For several weeks, investors have focused intently on every shred of news about potential changes in Federal Reserve monetary policy. Since the news that the Fed will begin to taper its stimulus programs (probably by the end of this year), market volatility has soared and investor sentiment has plummeted due to uncertainty about the effect a change in Fed policy may have on economic growth and equity markets. For years, monetary policy has softened as the Fed has pumped money into the monetary system in an effort to lower interest rates and encourage economic activity. Now that the Fed believes that the economy is improving, investors are unnerved by the idea that the Fed will begin reining in the easy money. In our opinion, the economy can withstand a gradual and well-publicized reduction in bond purchases and we strongly believe that the Fed will carefully monitor economic trends before making a move.
Overall, economic trends point to a healthy economic recovery. Consumer sentiment rose last week to the highest level in more than five years.[ii] The housing market continues to improve, with increases in both housing prices and sales.[iii] Modest growth in the job market, combined with increased property values and high stock prices, are making Americans more confident about the economy and many analysts expect consumer spending (a significant contributor to economic growth) to increase next quarter. While the economy still has a way to go before it’s considered fully recovered, we believe that there’s reason to be optimistic about future growth.
So, what does all of this mean for investors? Firstly, it’s important to be aware that markets are likely to remain volatile in the coming months as investors adjust to new Fed policies and higher levels of uncertainty. However, the ingredients for growth in equities remain intact: stocks are reasonably priced, interest rates are still near historic lows, inflation is not a threat, and corporate balance sheets are healthy. While we cannot predict the direction of market movements, all of these factors point to higher overall stock prices over the medium term. When markets run contrary to long-term economic trends, investors can be presented with the opportunity to build equity positions at attractive prices. That said, not all sectors or individual stocks will move in unison, and it’s important to make all investment decisions in light of your personal circumstances and financial goals.
When markets are roiled by volatility and investor fears, it can be tempting to throw in the towel or sit on the sidelines; however, it’s important to look behind the headlines to determine what course of action best suits your long term financial goals. If you have any concerns about your portfolio or any questions about how these issues may affect your investments, please reach out to us. We are honored by your trust and are happy to be a source of information to you and your family.
Monday: PMI Manufacturing Index, ISM Mfg. Index, Construction
Tuesday: Motor Vehicle Sales, Factory Orders
Wednesday: ADP Employment Report, International Trade, ISM Non-Mfg. Index, EIA Petroleum Status Report
Thursday: U.S. Markets Closed for Independence Day Holiday
Friday: Employment Situation, Jobless Claims.
Notes: All index returns exclude reinvested dividends, and the 5-year and 10-year returns are annualized. Sources: Yahoo! Finance and Treasury.gov. International performance is represented by the MSCI EAFE Index. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.
The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.
The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the NASDAQ.
The Nasdaq is a computerized system that facilitates trading and provides price quotations on some 5,000 of the more actively traded over-the-counter stocks
[i] Google Finance