Year to date the market is up just over 8% as measured by the S&P 500, and the bond market is up just over 5% as measured by the Barclays Global Aggregate Bond Index.
So far this year, the market has been able to find a way to grind out positive returns. In spite of the continued bull market there has been quite a bit of nervousness and pessimism. As the summer comes to an end, the volume of trading in the stock market should increase. History tells us that the volume in August is considerably lower than September because a lot of folks were squeezing in the last of their vacation time before the end of summer. Now we begin to hear questions whether the market will move up or down from the new trading and we see folks try to find ways to participate in the bull market and perhaps catch up on their returns. This is typically when we see folks increase their exposure to passive investments like ETFs and also active investments such as mutual funds.
We continue to believe the best place to invest is domestic markets. The U.S. Economy continues to expand at a moderate pace. In its Beige Book report the Federal Reserve said six of its twelve districts reported “moderate” economic growth. The stock market is at an all-time high but the economy is not. This is concerning to us but we remain cautiously optimistic. By various measures the stock market is fully valued but not so overvalued that it is in bubble territory. We believe this is because enough folks remain nervous that investors keep the market somewhat in check. While we are concerned that if companies begin to miss earnings projections or if the economy begins to slow we will see a market correction, for now it seems, companies expect some revenue growth and more importantly some earnings growth.
Europe has endured a rollercoaster ride, going from being universally hated three years ago to being universally loved about a year ago. We are now in a transition period where previously investors who were perhaps a little too optimistic are now focusing on the bad news in Europe.
We are seeing hedge funds and brokers drawing attention to fears of deflation in Europe, poor gross domestic product (GDP) numbers and weak industrial production figures, which has put pressure on markets. The military conflict between Russia and Ukraine has also added some fuel to the fire, and that, unsurprisingly, is making global investors nervous. In our view, these issues do merit watching but are not enough to move Europe back into recession.
In the immediate future we do not expect any improvement in economic data Europe. However, we believe that we may start to see some better figures coming through in the fall, especially if the conflict between Russia and Ukraine begins to calm down a bit.