Locally based CPA firm since 1956

Although there were plenty of headlines during the month of June, the markets continued the pattern of one step forward and one step back, finishing less than ½ of 1% changed from the beginning of the month.
I believe that over the course of the summer we will see upward revisions of previously reported numbers such as 1st quarter GDP, housing, and employment. With a bit of wind in the sales, we shall probably see a slight reacceleration in the U.S., Japan, and Europe.
A while back the WFG blog mentioned housing as being a key indicator of recovery. We have been looking for housing starts to be on pace above 1 million annually and really wanted to see the number come closer to 1.5 million annualized. In June the housing starts reportedly are on a pace between 1.2 million and 1.3 million. We view that as a sign of a healthy economy, one that may accelerate a bit in the second half of the year. A healthier economy is a sure sign that the Fed may raise interest rates sometime this year. The Fed has stated they will watch inflation closely. Keep in mind that the 4th quarter of 2014 is when oil took its precipitous drop from $110/barrel to $40 something/barrel. This will skew the inflation comparison numbers a bit as we will be comparing to disinflation numbers from last year. I’m sure the Fed is smart enough to understand that, but we will still see headline numbers that are not quite as inflationary as they may seem.
There are several reasons why the market may resume its next leg up; the 30 year mortgage rates are still historically low, corporate capital spending has remained constrained, inventory levels are under control, hiring has been muted, and merger & acquisitions have been immediately accretive, and stock ownership is at a 15 year low. All of these things bode well for investors. Albeit folks have not forgotten 2008 and are certainly more apt to exit the market quicker on bad news, there is a lot to be bullish about.
In the U.S., the butterflies in the stomach can be seen in the performance of High Grade Corporate Bonds which are continuing to underperform U.S. Treasuries. As we have seen in the fund flows, a significant amount of money is leaving fixed income funds and ETFs so hopefully this is a temporary fund flow effect and not a leading indicator of credit risk in the U.S. economy. But so far, this has had little impact on the Equity Markets. For now, pessimism over a Greece bailout has the upper hand and the market is likely to stay focused on headlines from Europe.