All-time highs continue to be surpassed with stocks as the S&P 500 was up another 2% in July. Interest rates held steady while the Barclays Aggregate gained another 0.46% last month.1 The pattern of positive economic data continues, although there hasn’t been a catalyst of tax reform or legislative changes to justify a continuation of the Trump Bull Run. We aren’t concerned just yet.
From a fundamental analysis of the markets, we believe that prices are a little above fair value. Unless we have a large increase in corporate earnings, our economic models might indicate that the market is over-valued if we see another 10% jump in the markets. To put this in perspective, our economic model hasn’t declared stocks being over valued since the dot-com markets of the early 2000s. Rest assured, we will continue to evaluate market conditions and suggest changes based on your personal risk tolerance and circumstances. Remember, those “animal spirits” we discussed in the April Summary could keep this market moving well beyond what any analysis can predict.
It is hard to pinpoint when the indicator will turn from stock maximum to minimum because there are a lot of moving parts when analyzing valuations at the macro level. Interest rate movements in today’s environment will be a strong influence, but with the US Dollar showing weakness, corporate earnings will be just as important. One disturbing trend with interest rates is how bond values have increased in interest sensitivity. The chart below shows that the Barclays Aggregate has averaged a 4.8 duration, but is currently at 6. This means that an increase in interest rates will have a more profound negative effect on bond values than we have seen in decades. This makes for quite a challenging investment quandary as we look for non-stock investment alternatives. Bonds may not be the safe haven they were once thought to be.
As I sent the kids off to begin another year of school, I was reminded that summer is nearing its end. Before we know it we’ll be surrounded by fall colors and holiday decorations. If you haven’t taken the opportunity to get a vacation in this year, consider doing it now. Just a quick weekend trip to recharge your batteries can do wonders! We have had great markets and a solid economy. Seize the opportunity before the dark and dreary temperatures fall upon us!
Enjoy the moments!
1 Thomson Financial
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