Domestic equity markets have by and large recovered from the volatility of July and August with many reaching new all-time highs. We see four key areas that have been driving up the markets:
- A strengthening economy and rising corporate earnings
- Low interest rates (even if they are artificially induced by the Fed Policy)
- Low oil prices
- The adage of “don’t fight the tape” (i.e. the market trend)
There are a number of important factors we are monitoring as we move into the fall.
Mid-term elections
Gallup reports no single issue resonates with more than 20 percent of voters, with the top three being immigration (17 percent), government dissatisfaction (16 percent) and the economy (15 percent). At election time, it is always interesting to look at history and how segments of the markets have performed during mid-terms. Ned Davis Research looked at the past seven mid-term elections and identified the best and worst performing sectors historically. (It should be noted that while it is fun to look at these comparisons it is not always clear as to why a sector has performed a certain way during an election season and is by no means predictive of how the sectors may perform in 2014 or during any election going forward.)
The Historically Best Performing
Electrical Equipment
Software
Technology Hardware
Energy Equipment and Services
Biotechnology
The Historically Worst Performing
Industrial Conglomerates
Building Products
Consumer Finance
Insurance
Banks
Geopolitical situations in Ukraine and the Middle East
It appears that the global markets have accepted the situation in Ukraine and perhaps have “priced it in” already. If the situation shifts and more overt Russian involvement occursmarkets could be further impacted. Any escalation of sanctions from the US or EU would be closely watched for the potential economic impact, in particular on an already weak Euro-zone economy.
In spite of the unrest in the Middle East, we have seen declining oil prices. At this juncture, the global markets have not been substantially unnerved by the turmoil. This could change if broader Western military involvement is seen. Should ISIS gain control of major oil production infrastructure, this could cause volatility in the global markets.
Further, any possible terrorist attack on a Western target could cause disruption of the markets.
The unfortunate reality is that investors appear to consider these geopolitical situations normal at this time.
Fed Policy and Interest Rates
Rising interest rates or a surprise move by the Federal Reserve continue to be some ofthe most significant risks to our markets. We, along with many other experts, have been talking about the potential risks — in particular to bonds— for an extended time. While those risks have not manifested to-date, they remain very real and careful attention must be paid in particular to the bond sector.
Having said that, the Fed continues to signal we will not see rate increases this year, which means the markets could continue to rise from their influence.
The environment is one where being “correct too early” is essentially being wrong for now.
Possible Outcome for 2014
While it is impossible to predict the future and the direction of the markets, it is clear that we remain long overdue for a pullback from recent all-time highs. This could lead to periods of volatility and potential weakness. However, we presently believe any such correction most likely will be modest and short-term in nature.
We would rather be “correct too early” and perhaps wrong in the short-term, keeping in mind what is likely to unfold when rates rise. Now is not the time to try to squeeze out every ounce of possible return. Instead, a patient and deliberate approach remains prudent.
Given the challenging environment that lies ahead and our ongoing commitment to provide our clients with the best possible service, Lowe Wealth Advisors is excited to announce that we have hired a Chief Investment Officer. We will welcome Bradley Williams on August 31st as our new CIO. More information about the CIO position can be found in the Q&A blog post and more information about Bradley can be found by visiting our website.
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This commentary is intended for the dissemination of general information regarding market conditions to Lowe Wealth Advisors clients. The information contained herein should not be construed as personalized investment advice. Past performance is no guarantee of future results, and there is no guarantee that the views and opinions expressed in this report will come to pass. While any general market information and statistical data contained herein are based on sources believed to be reliable, we do not represent that it is accurate and should not be relied on as such or be the basis for an investment decision. Any opinions expressed are current only as of the time made and are subject to change without notice.
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