We have reached the halfway point for 2015, and if you look at the indexes, most are about where they were at the beginning of the year. Dow +1.6%, S & P 500 +3%, Transportation Index -7%, Utilities -8%, and Corporate Bonds -1%. Bucking the trend is the Smallcap Index +6.5%, the Nasdaq sector +9%, and the International Index at +7%.
During this type of volatility the managed funds usually outperform since they are able to trade during the ups and downs. This year is no different. In our last email blast we told you how the general public was moving out of managed funds and into unmanaged index funds in mass. The old adage of being contrarian to the masses may ring true once again.
As we talk to investors and other advisors, we find that most investors are frightened that things will go horribly wrong in the markets and they will lose money. They are not positioned for the upside, yet the path of least resistance continues to be up. Although the market, as measured by the S & P 500, goes up 50 points one week and then promptly declines 40 the next, the support level of 2090 continually holds up on the downside. Individual investors seem to have no interest in being in stocks. Institutional money on the other hand seems to show up as buyers each time the index declines to that support level. From a technical analyst viewpoint, this is a favorable sign looking forward.
Stocks are also getting a boost from recent selling in the bond markets as that cash is being partly moved to equities. The talk of rising interest rates becoming a reality soon has spooked some bond investors that have been selling to avoid principal losses. Some bond funds have lost about 3% of value recently at just the talk of interest rates rising. It remains to be seen if investors in the intermediate and longer maturity bonds will stampede for the exits if rates do rise as talked about by the Federal Reserve.
Precious metals have continued their year long slide and falling oil prices have decimated quite a few oil industry stocks. These stocks should rebound as demand catches up to supply causing prices to rise again.
The past five or so years have definitely shown us that markets in all areas are affected by varying local and world events. Recessions, monetary policy, political squabbling, world conflicts and nature all can play a part in where money flows. We have experienced a few very good years lately where most sectors have advanced almost non-stop. Years like this most recent one test your patience with increasing volatility and returns much harder to come by.
We know for certain that there will continue to be changes in our financial system. The inevitable realization that as a country we can’t keep kicking the can down the road regarding our debt, social programs, public pension funding, etc. will affect taxes, interest rates and inflation. It may not be enough for investors to continue to use the same investments as in the past. There will be new opportunities and products that will evolve and we will need to identify, vet, and implement them into our strategies.
Currently, the continuing Greece versus European Union bailout saga is keeping both the bond and stock markets on edge worldwide. Volatility will continue in the short term as the situation irons itself out. This short term noise does not change our position that we are still in a longer term bull market and will use declines as a buying opportunity.
Enjoy your 4th of July Holiday!