July has been a month of ups and downs. One day up and the next day down, one week up and the next week down. It appears each day’s breaking news dictated the market direction. The headlines streamed throughout the month: passenger plane shot down over the Ukraine, Israeli forces enter Gaza, oil prices dip below $100 per barrel, consumer confidence surges to 90.9, second quarter corporate earnings growing at an 8-10 percent annual rate, Argentina defaults on their debt, and the first release of second quarter GDP shows the U.S. economy expanding at 4.0 percent.
July gave us Dow 17,000 and an S&P 500 ever so close to 2,000. With the stock market touching record high territory and the 2008 financial crisis still burned into the investor’s psyche; it’s no surprise investors are a bit jittery. A fatal last day of July caused the S&P 500 to lose -1.38 percent for the month, the NASDAQ retreated -0.82 percent and emerging markets lead the way with a positive 1.93 percent return. While the overall market has not experienced a meaningful correction recently, we are encouraged by the rotation of leadership within the stock market from momentum growth companies to dividend and value names.
The Federal Reserve seems to be pressing all the right buttons and saying the all the market friendly things; but raising interest rates some time in 2015 is now part of the dialogue. Interest rates were stable in July, but wider high yield credit spreads brought some sanity back to this overvalued sector of the bond market. Performance among the various bond sectors was mixed in July. The monthly winners were: long-term U.S. Treasuries (+0.55 percent), municipal bonds (+0.18 percent), and US Treasury TIPS (+0.03 percent). The monthly losers were: high yield bond (-1.33 percent), mortgage-backed securities (-0.59 percent), intermediate U.S. Treasuries (-0.26 percent) and investment corporate bonds (-0.06 percent). Overall, the Barclays Aggregate Bond Market Index was down 25 basis points for the month.
At the beginning of the year, our 2014 forecast was for stocks to return high single digits and bonds to deliver results in the three to four percent range. The calendar year forecasts have been achieved in the first seven months, so what lays ahead for investors the remainder of the year? We are still confident in the forecast and feel the market may be running five months ahead of itself. This is not a reason to panic, rather a chance to dial back return expectations, stay the course and give valuations a chance to catch up. The second quarter rebound in GDP and earnings growth are just what the market needs to justify today’s valuations and set itself up for a prosperous 2015.
As a money manager, we have the privilege to speak with many independent advisors and their clients. Our sense is the mood among investors is one of caution, respect, surprise and angst. Investor anxiety is a healthy sign and we feel bodes well for the markets heading into 2015. Bull market tops are formed when everyone is rushing to buy indiscriminately. This is not the case in today’s market. Investors are cautious and waiting for the illusive ten percent correction before allocating cash or bonds to the stock market. Investing is a marathon, not a sprint. Prudence, patience and long-term participation are the best ways to achieve your financial goals.