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.

The term “Goldilocks Economy” was coined by Dr. David Shulman in the early 1990’s. It describes an economy with sustainable moderate growth, low inflation, a market friendly monetary policy, low interest rates and increasing asset prices. This term has recently resurfaced in the media as it accurately describes our current economic situation. This complacent state will not last indefinitely, but let’s take a moment to enjoy it.

The economy’s best friend the past six years has been an accommodative central bank. The Federal Reserve implemented a zero interest rate policy over five years ago and Janet Yellen’s recent comments suggest there is no predetermined end in sight. The Fed Fund Rate remains targeted between zero and twenty-five basis points for the foreseeable future. The Federal Reserve’s three plus trillion dollar bond buying spree aimed at stabilizing the banks and adding liquidity is coming to an orderly conclusion as they complete their tapering program. The current dovish Fed will likely remain market friendly through 2014 despite recent the inflation and employment numbers.

Inflation ticked up to a 2.1 percent annual rate, slightly above the Fed’s target, but the Fed assured investors all is well. Also, the unemployment rate is falling faster than the Fed’s expectations, but the Fed removed their self-imposed 6.5 percent unemployment rate line in the sand. The revision of U.S, Gross Domestic Product (GDP) 2014 first quarter number showed the output of goods and services decreased at an annual rate of 2.9 percent. While this was the first negative GDP quarter since the first quarter of 2011, the market shrugged off the news as a weather related decline. Positive GDP growth should return in the second quarter.

The market, in its Goldilocks state, gave both bond and stock investors cause for celebration. For bond investors it was lower long-term interest rates and tighter credit spreads. Performance across all bond sectors was positive and the six month numbers would make great annual returns. For the six months ended June 30, 2014 the U.S. Aggregate Bond Market returned 3.93 percent, high yield 5.46 percent and municipal bonds 6.00 percent. Long-term U.S. Treasuries led the way with equity like 12.14 percent return over the past six months. For bond investors 2013 is now a distant memory, but let’s be reasonable and lower future return expectations into the low single digit area.

The stock market rolls along setting new highs with regularity. We have been consistently bullish on stocks recognizing the power of the Federal Reserve, the strength of corporate earnings and the concept of reasonable valuations. As we sit atop the mid-year mountain it would be prudent to caution investor expectations. Our 2014 stock outlook was for high single digit returns. This was based on corporate earnings growing at seven percent, dividends providing a two percent return, and valuations remaining constant. Year to date the S&P 500 is up 7.14 percent, NASDAQ gained 6.18% and emerging markets rose 6.14 percent. Looking forward, the Federal Reserve will likely be less of a market tailwind as they complete their taper program and begin to tackle current inflation and employment trends. Corporate earnings will need to accelerate to achieve the seven percent annual growth and valuations have been stretched to bring the market to its mid-year summit.

At the end of the day, we are long-term investors who believe in properly allocating among diversified portfolios. Our best advice is to set realistic expectations and stay invested for the long haul. Every year the market will experience some form of a pull back or correction. If we get one in the second half of 2014 don’t be surprised, just be confident in your long-term investment plan and stay on course.

The S&P 500 established new record highs again this month, closing over the 1,900 level on multiple occasions. It’s hard to believe this same index was below 700 in March of 2009. By any definition this has been an impressive bull market, yet as Rodney Dangerfield would say, “this market gets no respect”.

The non-believers have their reasons: the Federal Reserve engineered this rally, the next 2008 is just around the corner, economic growth is too slow, unemployment is too high; politicians are leading us down a path of fiscal destruction, the market is rigged, slower growth in China, or political uncertainties around the globe to name a few. While some of these concerns are valid, the fact is record corporate profits are driving stock prices to record levels. The key question is; can the positive price momentum continue? Stocks are not cheap at today’s valuation and corporate profits slowed in the first quarter as weather impacted the bottom line. If May’s records are to be broken later this year the economy and corporate profits need to regain their momentum.

May stock returns were positive across the board keeping us in line for high single digit returns for the year. The S&P gained 2.35 percent for the month and closed at a new all-time high, 1,923.57. On the strength of Apple the NASDAQ appreciated by 3.30 percent. Even the beleaguered MSCI Emerging Market Index added 3.49 percent in May.

One of the biggest market surprises this year has been the strength and performance of the U.S. bond market. When the year began everyone was calling for higher interest rates and negative returns for U.S. fixed income. In predictable fashion, the opposite has occurred. Interest rates are lower, credit spreads are tighter and returns are exceeding expectations.
Interest rates directly affect bond prices as interest rates move lower, bond prices move higher. The opposite is also true. Beyond the short end of the yield curve, rates have moved lower this year causing bond prices to rise.

Bonds had a solid month as the yield on the 10-year U.S. Treasury dipped below 2.50%. The Barclays U.S. Aggregate Bond Index returned 1.14 percent in May with long-term US Treasuries once again providing the best monthly fixed income return at 2.88 percent. Intermediate Treasuries gained 0.69 percent while corporate bonds and mortgage-backed securities returned 1.37 and 1.20 percent respectively. The fully priced high yield sector added 0.92 percent in May.

Bond return expectations should match the reality of today’s fixed income market. Interest rates are near all-time lows; credit spreads are approaching historic tights, and the Fed is beginning the fifth inning of a nine inning Taper program. With yield’s low, expect low single digit returns from your bond portfolio. Your bond portfolio may experience modest price fluctuations in the months ahead, but the main return driver will be the income earned. Unfortunately, that income amount low due to tight credit spreads and low interest rates. Stay the course in bonds, but adopt realistic return expectations.

Commodities were the only major asset class losing value in May. Gold lost -0.15 percent of its value during the month and it is down -12.27 percent over the past year. The broader based Dow Jones UBS Commodity Index was down -2.87 percent for the month, but still up 2.50 percent for the trailing twelve months. Low inflation does not help commodity prices.

Amid all the daily noise from this past month from the hype of new records to the scare of the next correction; our best financial advice is to develop a thoughtful financial plan tailored to your situation and stay your course. Time will bring to your financial destination.