July 2014 Monthly Summary

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July started with a bang, but a huge drop on the last day of the month changed all of that.  The promising start of the month for stocks ended up with a loss of around 1.5% as measured by the S&P 500.  The Dow Jones Industrial essentially lost all of its 2014 gains in the last week of July.  Most diversified investors should still have gains, as the bond and real estate portion of the portfolios continue to hold value while interest rates have remained in check.

The Ukraine continued to stay in the headlines as sanctions with Russia continue to get more serious.  Concerns also arose over Argentina’s insolvency as the country defaulted on its debt for the second time in 12 years.  This further highlights how fragile the global economy remains to be.  Domestically, our economy continues to show signs that it is emerging from the global recession ahead of most other parts of the world.   Zack’s Research reports that nearly 67% of Q2 corporate earnings have beaten consensus expectations.  Along the same vein, GDP advance estimates released by the BEA show the economy grew at an annual rate of 4% in the second quarter.  This is much improved over the -1% reported in the first quarter.

The stock market, however, does not move in a straight line.  Volatility was bound to reemerge.  After all, July was only the fifth down month that the S&P 500 has experienced in the past two years!  We could have a continued down trend in the coming months just as a reversion to more normal stock market volatility.  This does not necessarily mean we are in store for a large correction anytime soon.

The table below shows some key characteristics of what the market looked like at the peak of the internet bubble (March 2000), the peak before the financial crisis (October 2007), and where we are today.  The S&P 500 is 25% higher than those peaks, but the other metrics are more telling of how the market really is valued.  The internet bubble is easy to justify as a peak with the P/E ratio abnormally high.  On the other hand, the financial crisis is not so different than where we are today, if you only look at the data in this table.  However, most of the problems that caused the housing bubble have been regulated away.

 VGJulyTable

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In truth, there can always be a new bubble brewing under the surface or a new threat that can seemingly take a toll on the markets.  This is why we study the markets looking at fundamental data as well as technical.  Enjoy the rest of summer and hope for sunny markets ahead.

 

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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