Wall Street has developed its own nomenclature over the years to uniquely describe marketplace situations. The adage best describing the current market and season is the “summer doldrums”. This refers to a period in the markets when trading volumes are reduced; many brokers and investment personnel are vacationing prior to the official end of the summer doldrums, Labor Day.
August produced lackluster results as the stock and bond markets quietly moved downward during the month with generally lower trading volumes. Commodities bucked the trend with positive returns after many months of poor performance. The markets are entering the fall season with more questions than answers. Will the Federal Reserve begin its much discussed tapering? Will the tension in Syria and the Middle East escalate into a larger military conflict? Will higher interest rates derail the housing recovery? Will another debt ceiling debate cause market angst? Will the stock market and corporate earnings hold up under external pressures? Unanswered questions mean uncertainty which leads to both opportunity and higher market volatility. Expect the unexpected in the coming months.
The international and U.S. equity markets all posted negative returns for the month ranging from down 4.11% on the Dow Jones Industrial average to down only 0.82% on the NASDAQ Index which was helped by the strength of Apple. Trailing twelve month numbers are still very impressive for the major stock indices at just below twenty percent. Emerging markets and commodities continue to lag, but are beginning to show signs of life once again. Their day will come.
If you have been participating in the market, our advice related to stocks is to stay the course and remain diversified. If you are observing stocks from the sidelines, look for any short-term price weakness as an opportunity to achieve your proper allocation to equities. While stocks continue to explore new record high levels, their current valuations are justified by historical standards. Remember the main role of stocks in your portfolio; to provide for long-term growth and build wealth. They have been doing exactly that for the past four plus years.
The bond market violently sold off in May and June as the Federal Reserve hinted at ending their accommodative policies. Yields on the 10-year U.S. Note rose from 1.70% to 2.70% in quick fashion. The “taper” is now priced into the bond market and August was the second consecutive month where bond investors are getting accustomed to a new trading range. It appears the 2.50%-3.00% 10-year Treasury yield range has replaced the artificially low 1.50%-2.00% range of the past. This is not all bad new as the bond market is more attractively priced looking forward.
Bonds provide for capital preservation, income, stability and low correlations to equity returns; important components for successful long-term portfolio strategies. Resist the temptation to change your long-term portfolio strategy because of short-term price movements.