A August Overview

The markets have stalled a bit late in the summer but, as we have been communicating for the last several months, we have been expecting a corrective phase.  It’s been well over a year since the stock market went through a normal correction and stocks have looked “tired” for the last several months.  As well, August and September tend to show poor seasonable performance.  

Moving forward, there are two economic question marks that will determine the longevity of this economic expansion in the coming quarters and years:

  1. How fast does the economy re-inflate? – Around the world, central banks have been lowering rates for years, because inflation has been low and the greatest threat we faced was deflation.  But, as we have seen in the US, rates are now on the rise.  The “pace” of those rate increases will be directly affected by inflation.  If inflation stays low, rates will rise slowly.  If inflation heats up, the central banks will be forced to raise rates faster, which would be unfavorable for stocks.  
  2. Will the global economy continue to improve? – For years, the US economy has pulled the rest of the world higher.  In reality, Europe has been in borderline recession for the last ten years.  That being said, the US economy has had to do the heavy lifting.  This year things changed.  Europe and China are growing and Japan has shown good economic numbers.  So, if countries around the world continue to support the global growth effort, this rally could become sustainable.  

Keep in mind, we have not turned bearish on the markets, we simply feel that the markets are in the process of taking a breather.  In reality, the global economies are lifting right now and earnings have been strong.  This is a very positive scenario and one we think will push markets higher over the coming years.

A July Overview

The markets have continued their run into new high territory and most major market indices have participated.  In fact, the NASDAQ Composite – an index primarily known for its technology bias – has hit new highs not seen since 2000.  That said, there are a couple of red flags we are seeing in the markets:

  1. We are entering into a seasonable unfavorable period for the markets.  Most people believe October is the worst month for the markets because of the 1987 meltdown.  But, September has actually been the month that the markets have performed their worst.  
  2. The internals of the market have started to erode.  As the markets have hit new highs, we have found fewer and fewer stocks in the indices pushing the markets.  This typically will not last very long before the markets correct.
  3. Most indices are extended from their longer-term moving averages.  Most markets will either come back to their moving averages, or move sideways for a period of time when we see this happen.

To be clear, we continue to see strength in the global economies.  As mentioned previously, Europe looks to be accelerating, which is great news.  But, it has been almost a year since we saw a correction and we are probably due to go through a corrective phase.  That said, we also feel that any correction in this time frame will give way to higher prices by year’s end.  As such, we are exploring ways to capitalize on any market weakness in this time frame.  

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