After beginning 2014 with a downward movement of the S&P 500 index in January, February gained all that back and more. Things have continued to move nicely since then to end the 2nd quarter with a YTD return of 7%. (Vanguard Index 500 Fund) The developed international markets were up 4.5% and emerging markets ended up 6.1% YTD at the end of June.
Well that sounds great, but where do we go from here? We’re sure you have noticed the markets are setting all-time highs, which gives some investors confidence and others pause. We have also seen market volatility currently at an unprecedented low. The combination of low volatility and high stock prices can lead to some complacency about market risk. This complacency can have a tendency to leave some investors more vulnerable to negative surprises.
Currently, stock valuations are basically in the normal range. In other words, we are not building a bubble here. Fortunately earnings have kept up relatively well and are still coming in with decent numbers. However, on a fundamental basis, we don’t expect record returns to continue as they have since the market is currently fairly valued.
Some of the issues we are watching:
Geopolitical conflicts in Ukraine and Iraq continue to be an unknown. Iraq problems could conceivably have more impact over time due to the potential impact on oil. China’s economy continues to face some risks due to the heavy run-up in their debt after the financial crisis.
Of course there is the U.S. public debt to consider. The Fed is staying fairly consistent with their message. Their bond buying continues to ratchet down to where it is expected to cease later this year.
Bond prices have done well this year, which is a surprise to many. The 10-year Treasury yield ended the quarter at 2.53%. You will remember it was very close to 3% a year ago.
Inflation risks have increased slightly, but not enough for us to recommend any changes in allocations.
Should anything be done differently?
We continue to monitor the global markets and economic conditions in an effort to keep our models tweaked as closely as possible to the risk budget of each of our clients. Now that we have the tools to precisely measure expected risk, we are even more comfortable that allocations are as they should be.
Let us know if you have questions on this or any other issue.
Max W. Smith, CFP®, CIMA®
Kent G. Forsey, CFP®
12213 W Bell Road, Suite 209
Surprise, AZ 85378