Halfway Point Situation Report

Posted by on Jun 30, 2014

According to the folks at Standard & Poor, it looks as if we’re ending the first half of the year up around 5% on the S&P500 Index for its sixth quarterly gain. Pretty solid result after such a nowhere first quarter.

We’ve got the S&P and the Dow Industrials currently hovering right near their all-time highs. The NASDAQ is at about its best levels since the dot.com days. Noted Professor Jeremy Siegel of the Wharton School said last week that he’s sticking with his projection for 18,000 on the Dow by year-end. Many other economists are also revising their estimates for positive growth in the quarter to come.

Regarding the economy, the source of the corporate profits that drive share prices, data firm Markit had two very positive reports last week. Their survey of the service sector of the economy recorded its best reading since the surveys began in 2009. The manufacturing survey came in at its best reading since May 2010.

As Chris Williamson from Markit said, “US industry is booming again.” Indeed, it truly is.

More positive trends

Corporate profit margins remain high with balance sheets heavy with cash. This cash could be used for stock buybacks, dividend increases and, as we’ve seen more of lately, acquisitions of other companies.

There’s another kind of less visible result of this growing economic strength which can have potentially wide-ranging benefit. We’re now getting to a point where we’re just about maxed out on the capacity of the existing system to provide what’s needed. Put another way, it means that there’s major potential for widespread investment by businesses to purchase capital equipment and services to meet these growing demands. This, in turn, will help create jobs in many other businesses of all types and sizes.

And the real estate market doesn’t appear to be turning down. There’s a great deal of positive momentum in the sector. The Nat’l Association of Realtors reported that sales of existing homes rose more than expected in May by the most in three years. They also said the supply of homes for sale is now at the highest level in a year and a half and new home construction is also continuing to rise.

Escape velocity

Stocks are known as a forward-looking economic indicator. I think the case for this can be reinforced most recently by the market’s record over the past five years. It’s been validated by the improvement in the economy that has followed it rise.

What I see (feel?) happening – finally – is that the economy, is bringing all its parts together to be able to operate and grow on its own. You know how, after you’ve had the flu or otherwise been kept in bed for some time, how hard to it is to get your balance and strength up to normal? That’s the economy now. Been sick, had secondary infections, been given lots of meds and now is just becoming able to stand alone again.

My point is that the economy will absolutely be able to stand and run on its own very soon, escaping the doldrums and drag of past events. Dr. Janet’s taking away the last of the Fed’s market meds may be a little uncomfortable for a bit when it happens but I’m convinced we’ll do fine.

One more thing…

We may see the markets just kind of tap dance sideways until this quarter’s earnings reports start to come out in mid-July. I understand that, in spite of the record and these reports on economic fundamentals, many investors remain nervous. At the first sign of a correction or some other event perceived as bad for the markets, they’ll likely be looking for that path of least resistance and take money out of the market.

If you feel you might be in that category, please do one thing first before actually closing your positions. Check out the chart of how the S&P500 has done over the past 10 to 20 years – with or without dividends reinvested as you please. While in no way a guarantee of how your future investments will go, it is factually representative of what has actually happened. So, here’s what I’d like you to consider.

The positive results you’ve seen over time required only one thing from you to be able to have a chance have to come close to them. You have must stayed invested…


The markets are closed for the 4th on Friday and will be only open a half day on the 3rd.

Unless the markets do something to warrant it, I won’t be publishing a letter next week.

Happy Birthday to us!




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To get an overview of economic conditions, use this link. It’s updated monthly.http://www.russell.com/Helping-Advisors/Markets/EconomicIndicatorsDashboard.aspx

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