August 5, 2015
The Second Half of the Year Holds Promise
The S&P 500 has been at a virtual standstill thus far this year, trading in a narrow range. July was not much different. The almost 2% rise was just enough to erase losses from June, but history suggests the broad-market index could break out of those constraints during the second half of the year. Earnings, too, appeared to have lost some momentum (more tortoise than hare) but have actually been respectable so far this quarter. In fact, of the S&P companies that have reported earnings this season, almost three-fourths beat profit estimates and half of them topped their sales projections.
6/30/15 Close 7/31/15 Close Change Gain/Loss
DJIA 17,619.51 17,689.86 +70.35 0.40%
NASDAQ 4,986.87 5,128.28 +141.41 2.84%
S&P 500 2,063.12 2,103.84 +40.72 1.97%
MSCI EAFE 1,842.46 1,879.75 +37.29 2.02%
Performance reflects price returns as of July 31, 2015.
Raymond James Chief Investment Strategist Jeff Saut says he continues “to believe we are in a secular bull market that has years left to run, even though our models suggest a very modest pullback over the next few weeks. If correct, that pullback is for buying.”
Investors, though, may get caught up in headlines about volatility in Chinese equity markets, rising interest rates and lackluster wage growth, but markets only care if things are getting better or worse, Saut explained. And, in his view, indicators are gradually getting better over time. One reason for his optimism is the fact that secular bull markets tend to last 14 to 15 years (we’re about 6½ years into this one) and return, on average, gains of about 16% a year, according to his research.
The Department of Labor’s Employment Cost Index for June showed that pay hasn’t kept pace with the improving labor market (U.S. employers have added an average 208,000 workers each month in 2015). This new data may factor into the Federal Reserve’s timing when it comes to tightening policy. It’s widely expected that the central bankers will raise short-term interest rates as soon as September and almost certainly before year-end. Federal Reserve Chair Janet Yellen emphasized that they plan to take a slow and measured approach to raising rates. The markets expect an initial bump soon, but will likely pay closer attention to the second move as an indicator of the pace and magnitude of future increases.
Should anything of substance change on the economic front, I will be sure to update you, especially if something could impact your long-term financial plan.
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