04 Aug Market Update – July 2016
The stock market has been recovering during July after the sharp selloff due to Brexit at end of June. Most experts had thought and predicted that Brexit would lead to a calamity and negatively affect markets around the world. This did happen, but only for a few days. Since then, most assets have rallied as central banks around the world continue to inject massive amounts of stimulus into banks and economies. The main central banks are the US Federal Reserve, European Central Bank, Bank of Japan, and the Bank of England.
This central bank effect has prevented many market selloffs over the last couple years and has also kept interest rates on bonds very low. Anytime the markets appear to be dropping, central banks step in to save the day. In addition, the economic indicators we watch have been stabilizing after showing negative signs throughout the year.
The S&P 500 is sitting at an all-time high with slight positive gains for the year.
The S&P 500 has also broken above the two year trading range it was stuck in, while the 10 year Treasury yield is near historical lows. This is a strange event as low bond yield usually foretell market weakness. However this is now understood as a byproduct of central bank intervention.
Another divergence is corporate profits and the stock market. Corporate profits have been trending lower the last couple years while markets are at the highs. Corporate profits may stop the slide in the 3rd quarter.
Housing in the US continues to be a bright spot along with the service sector. Home prices are appreciating around 5% annually along with strong demand for new homes to be built. Housing and services continue to be the bright spots in the US economy.
We have been prepared for a potential market pullback throughout the summer due to lower corporate profits, high stock valuations, and worsening economic data. This has not come to fruition and we are now looking more favorably at the future. We have maintained some allocation to riskier assets as there is always the risk of being wrong. Our allocation to stocks may increase shortly. We must follow the data and research so we can be prepared to protect our clients, but for now it is appearing that the storm may have passed.
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