August 2014 Monthly Summary

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August was another strong month for investors and shook off the jitters that made a brief appearance at the end of July.  The S&P 500 was up nearly 4% for the month as it closed above 2,000 for the very first time while the Dow Jones Industrial reclaimed the 17,000 mark.  As the barometer shows, stocks are up nearly 10% for the year while bonds are up 5%.  Longer term rates dropped to 12 month lows, which helped account for the jump in bond values.

There is definitely more greed in the market than fear.  Consumer sentiment is finally back to normal historical levels.  The markets are shrugging off the barrage of stories regarding ISIS in Iraq, Russia in the Ukraine, and the drought in California.  Instead, it focuses on corporate earnings and the Fed.  Fed chair Janet Yellen has continued to hammer that although unemployment has improved, there will need to be more proof of economic stability before they will begin raising rates.  Most experts believe that the tapering process will conclude later this year, but the fed funds rate most likely will not see any hikes until mid to late 20151.  This is accommodative for further corporate earnings growth, but is also designed to spur wage growth (and inflation).

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With the domestic markets performing well, you might expect other developed markets to follow suit.  However, European markets have failed to keep up, primarily due to their corporate earnings.  The chart illustrates how Europe has lagged behind in the economic recovery. President Mario Draghi of the European Central Bank (ECB) is now working to enact  quantitative easing programs similar to what our country had employed during the midst of the crisis.  The ECB has dropped rates precipitously, but they are now taking steps to do even more2.  This new agenda has sparked our interest to look more closely at Europe as a new investment opportunity.  In baseball terms, there seems to be more innings left to play in Europe than in the US.

Sticking with sports, I’ve been watching my son play a lot of tennis for his high school team in the recent weeks.  His progress from when he first started playing has been amazing.  He has now added the “kick serve” to his tennis arsenal.  This serve puts extra side and forward spin on the ball so it “kicks” into or away from the opponent.  It is a difficult serve to return if you fail to adjust to the kind of rotation the ball possesses.  This can be likened to… you guessed it… investing.  There are thousands of variables affecting the markets and your investments.  If you study the important variables, you can have a pretty good educated guess of how the ball will move and how the markets will act.  Every once in a while, though, an event happens (maybe a gust of wind or an unprecedented economic event) that you couldn’t have predicted, taking the markets and the tennis ball to a place you didn’t expect.  It is in those times that we react and make adjustments.

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Markets tend to climb a wall of worry.   We are looking forward to more climbing ahead, with the occasional gust of wind.

1Appelbaum, Binyamin. “Fed Chief Sees Not Enough Data to Raise Rates.” New York Times,  22 August 2014
2Riecher, Stefan. “ECB Unexpectedly Cuts Interest Rates as Outlook Darkens.” Bloomberg,  4 September 2014

 

Index information is used to represent market performance, but you cannot invest directly in an index.  Past performance is not indicative of future results.

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