CI Outlook - Archives

August 2013

 

Throughout July the market continued to move higher.  Dow Theory flashed another “all clear” and money flowed into stock ETF’s and mutual funds.  But August has arrived and May’s naysayers are back.  Citing events scheduled for September they are sounding the alarms.  Most cited is the September Federal Reserve meeting.  According to the pundits the Fed will start withdrawing stimulus funding at that meeting.  And we may hear who the new head of the central bank will be.  Next up are the German elections with the potential for Angela Merkel’s defeat.  This would again destabilize Europe.  Last and most disturbing is the potential for a budget deadlock in Washington, threatening another US government shutdown.  After the rapid advance in July, this potential for negative news may produce another period of market consolidation.  Seasonal tendencies, light volume in August and September’s reputation as the worst month for stocks, should serve to deepen concerns as the pullback progresses.  All of this ignores recent positive developments.

Consumer confidence has been rising and continues to do so.  Much of this is probably due to higher prices in housing.  The net result is continued growth in consumer spending, much of it on durables.  This is important to note as 70% of the US economy is still consumption driven.  The other economic report receiving little coverage is the trade deficit.  It shrunk again in June, due mainly to lower oil imports and expanding exports of manufactured goods.  This is good for the dollar and will help hold down interest rates as the economy improves. 

Overall we think the economy remains in a Goldilocks expansion.  That is slower growth, lower inflation and higher unemployment than the Fed would like.  So, headlines aside, the Fed will probably remain very cautious about raising interest rates in the near future.  If Congress and the White House can begin to make progress on the important fiscal issues of taxation and budgeting we believe corporate earnings justify higher stock prices ahead.  This may well take the form of a year-end rally which would once again carry markets to new highs. 

While the domestic markets have been very strong this year most overseas markets have not fared well.  The exception is Japan with it’s aggressive economic policy.  Although it is the 3rd largest economy in the world Japan’s economy has been moribund for the last 20 years.  Our investment there has done well.  Now we are beginning to look seriously at Europe as the next recovery candidate.  We are in the process of trying to identify the best ETF investment for European exposure.  Once we have made that determination we will make the investment,  if it is suitable for your account.  In the meantime we are holding proceeds of recent sales in cash and watching the developing market consolidation.

We hope you are enjoying your summer.  If you find time and would like to schedule an appointment to come in and discuss your portfolio please call.  We always enjoy a chance to visit with you.


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