First the good news. The S&P was up dramatically YTD through June 30 and we took advantage of that by trimming stocks in late June. We have had a longstanding stock overweight and we simply lowered our target stock exposure by a few percent. We remain overweight but less so than at almost any time in the latest seven or eight years.
The things which are front and center are:
- The Fed has changed to a more accommodative posture, but some market participants were hoping for a rate cut of 50 basis points at the July meeting.
- Employment growth continues.
- Inflation remains muted.
- Corporate earnings continue to grow although the pace of growth is lackluster.
- China trade talks are up in the air as China appears to be willing to take a very long view of things.
- Brexit is looming as the March 31 extension to October 31 appears to be passing without any orderly arrangement or deal in place.
- Recent declines in yield on the 10 year Treasury leave us with an inverted yield curve…..often a precursor to a recession.
- Election rhetoric is well underway bringing with it uncertainty related to taxes, healthcare etc., all as per usual but somehow refreshed and remade as uncertain during every election cycle.
As of the August 5th close, the S&P was 6% below its July 29 high but still 12% ahead YTD. We have had both sharp pullbacks and strong rallies in recent years. Today’s level of the S&P 500 is actually comparable to the level seen nineteen months ago in January 2018. The market most likely will consolidate below current levels. With earnings reporting season mostly behind us and the FOMC not scheduled to meet again for several weeks there is no identifiable potentially positive catalyst. Corrections of 5% to 10% are relatively common. It looks like we are in one now. The floor is achieved when the potential for positive news is on the horizon in the form of a new earnings season or FOMC action……or when there has been enough consolidation to achieve perceived fair value.
One identifiable underpinning of fair value is that the S&P 500 dividend yield is back to 2%. The current yield on the 10 year US Treasury Bond is 1.74% making stocks a good value relative to bonds.
Stock positions in seasoned accounts were trimmed in late June. But today we have been stock buyers in accounts with fresh cash. Our five year stock market outlook remains the same. Muted returns with considerable volatility. Stay tuned.Some trust products and IRA contributions/balances are not a deposit, not FDIC insured by any federal government agency, not guaranteed by the bank and may go down in value.