2nd Quarter Market Update 2014
In retrospect the second quarter’s theme seemed to be that what was bad news on the economic and global fronts, was actually good news for the market. The US GDP for the first quarter was revised to -2.9%, rising energy and food prices pushed the annual inflation rate up to 2.1% in May, Iraq is unstable and the Russians continue to antagonize Ukraine, but the S&P; 500 was up 5.24% after a 1.80% gain in the first quarter!
Also positive, when stocks moved up in the quarter, so did bonds. Remember, when bonds go up, the interest rate goes down. The 10-year Treasury had a 2.87% yield at the beginning of the year and is now around 2.50%.
Moving forward, the outlook for the economy is improving. The headline numbers on the unemployment rates are moving down (the participation rate is still a negative) while manufacturing numbers are also showing improvement over the 1st quarter. Keep in mind, however, that even though the Fed is winding down the Quantitative Easing Program, the economy will still continue to be bumpy. In fact I would not be surprised to see varying levels of growth in GDP for several quarters ranging from 1.5% to 3%. This, along with the sluggish participation rate in the unemployment numbers, means the Fed will keep interest rates lower for a longer period of time.
In the long term the overall macro environment for stocks is still positive, however. Valuations are still attractive on high quality large cap companies. Baby boomers demand dividend-paying stocks to stay ahead of inflation and have an income stream, while the individual investor still has a lot of cash sitting on the sidelines. If we can ever get any fiscal reform out of the government, especially on taxes, it will only be an added bonus for stocks.