July Investment Letter

Categories: Articles

Here we are; just past the mid-year point. The market is up over 7% year-to-date which would be good by most standards. Second quarter earnings reports are just starting to come out. It appears earnings momentum is regaining traction after a weather-affected soft first quarter.

Last year was a bonanza year even though it started with huge uncertainty. Going into 2013, there was a budget battle in D.C. and most pundits predicted anemic market returns. However, the S&P 500 returned over 30% and this caught most people off-guard. With such large returns and with a brutal winter, the first quarter of 2014 could be characterized as choppy. Bond yields plummeted and the market was pretty flat. This rally in the bond market also caught most people off-guard as the Fed’s continued reduction in quantitative easing certainly should have seen rates increase not decrease.

What these events remind me is that no matter how smart you might think you are the market has a way of proving the largest number of people wrong. I’m further reminded that the long term trend is up and that we will continue to have bumps and sometimes major bursts along the way. This is as certain as the sun coming up tomorrow. Maintaining “iron stomach-like” rationale is the number one ingredient for successful investing along with patience, faith, and discipline.

As we look out into the future, I believe the next 18 months will be good as interest rates should remain comparatively low. However, on the horizon lurks trouble. At some point, the Fed will lose control of inflation and at that point, it will have to react with rapid rate tightening. This is the event that I am keeping my eyes trained on.

In the meantime, equities are fairly reasonably valued. There is still huge pent up demand in housing and autos. Budget deficits are coming in due to increased tax revenues. Balance sheets are strong with lots of cash. Tax policy will be revisited in the next couple of years. An election cycle looms. Manufacturing seems to be turning in America.

There is a lot of work to be done – immigration, corporate tax policy, healthcare refinement, social security refinement, regulatory overhaul, etc. The good news is we don’t have the irrational exuberance and the excesses that come with such conditions. In short, I remain optimistic for the short term that the equity markets remain the place to be.

Provided by Jay W. Cohen, MPA, CPA, CFP®, of Monterey Wealth
(404-201-2284 or jay.cohen@lpl.com)

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