With the lack of Wall Street drama, the markets continued to head in one direction: up. U.S. stocks ended June and the second quarter higher and the Standard & Poor's 500 recorded the fifth consecutive month of gains and the biggest second quarter gain since 2009.
For the first half of 2014, the S&P 500 rose 6.1%. The good news is that a positive first half historically favors a positive full year result.
The first half of the year was filled with surprises that few could have foreseen - and yet the markets seemed not to notice. All the reasons that would have been expected to cause volatility up to this point (continuing turmoil in Ukraine and new conflict in Iraq) have had little to no impact.
The U.S. economy is improving but is still below trend-line growth and the global economic recovery also remains on track.
So can we continue to expect this relatively smooth sailing to higher highs in the stock market? Prudent analysis suggests “no.” We expect we’ll see some upward pressure on volatility which will translate into wider market moves than we have seen so far this year. The S&P 500 has not moved more than 1% in a single day since April 16th. The law of averages suggests a single or multiple headline events will spur market movement. It will keep working its way up until we start to get enough bad news from the rest of the world. So don’t be surprised to see the market pullback. This is nothing to be overly concerned about as it is part of the normal course of events. A correction is coming, it's just a question of whether it hits in summer or fall.
Most analysts we follow see stocks finishing the year with returns in the mid to high single digits and interest rates trending modestly up. Not a great year, but a decent one. While stocks are not cheap, consensus says they are not in a bubble. As the economy improves, stocks have room to move higher.
As we write this, the Dow Jones Industrial Average crossed 17,000 for the first time. The stock market has more than recovered from levels seen during the depths of the financial crisis more than five years ago. This rebound and subsequent climb to record levels has occurred in an environment highlighted by modest growth and low inflation. Stocks can obviously do well under those conditions. Slow and steady can win the race.
Now for some advice. Don’t be swayed by daily business headlines. You need to understand context. For example, the evening news will broadcast the Dow Jones Industrial Average dropped 100 points. The mere fact that the index dropped triple digits can cause needless worry. But given today’s value of the DJIA that 100 points equates to roughly .6%. Slightly more than half of a percentage point. A mere blip in the overall scheme of things. And as a reminder, the DJIA only reflects the 30 companies in that index. A slightly better way to get perspective is the Standard & Poor’s 500 Index. That index includes 500 of the largest companies in the U.S.
Those indices do not include international and smaller companies that make up the bulk of the stock market universe. Because our portfolios are globally diversified, relying on a DJIA or S&P headline may not be accurate. Besides, almost all of our portfolios hold some bond funds too and those funds often move opposite to the stock markets.
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The views expressed here are that of myself or the cited individual or firm and do not constitute a recommendation, solicitation, or offer by myself, D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.
The Jacksonville Business Journal has ranked D2 Capital Management in the top 25 of Certified Financial Planners in Jacksonville. The Firm is also a member of the Financial Planning Association of Northeast Florida, the Jacksonville Chamber of Commerce, the Southside Businessmen's Club, and the Beaches Business Association.
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