Interest rate cuts and rising hopes for a trade deal between the United States and China are boosting confidence in the financial markets and creating fertile ground for investors who have stayed the course in the equity markets. As earnings season wraps up, the Winch Financial investment team is pleased with its current portfolios, which are well-positioned to take advantage of this extended bull market. The S&P 500, Dow Jones Industrial Average and NASDAQ Composite all have been trading at record highs recently as investors get a more positive picture of American corporations’ health. Additionally, the fact that the U.S. and China are close to finalizing a Phase One trade deal is a positive step and has changed market perceptions regarding the trade war. The low interest rate environment is also providing a bullish backdrop for stocks. After underperforming during the year, emerging markets are also starting to perform better. Although stock valuations are starting to extend, many still offer favorable risk/reward tradeoffs, which allow tactical investors like us to find even more solid investment opportunities. Of course, a pullback is always possible, especially when so much of investor sentiment is driven by headlines. We will be monitoring those factors carefully. It is equally likely that those investors who have trailed the market this year will be playing catch up before the end of the year, which will lead to some performance-chasing support for the market and a potential year-end rally. As always, our team will be analyzing these market factors closely and adjusting our portfolios as they deem necessary.
With the S&P at approximately 2,000 and approaching all-time highs there are some key factors to be aware of that will be major determinants of whether the bull market cycle continues. Factor 1: Federal Reserve Monetary Policy – On September 17th, the Federal Reserve is going to release their most recent decision on interest rates. While no one is expecting the Fed to raise interest rates today, the consensus market expectations is that the Fed will raise interest rates mid-year 2015. Any hint from the Fed’s press release or Janet Yellen’s comments at a scheduled press conference this afternoon that the Fed might act earlier to move interest rates higher will likely be a negative headwind for the market. A dovish Fed has been a major driver of this bull market and any sign the Fed is becoming more hawkish will be a hurdle the market will have to surpass. Factor 2: European Economic Growth – Recently we have been seeing a significant slowdown in Europe. For example, Italy recently released second quarter 2014 GDP numbers that indicated it was in a recession again. This is the third time Italy has been in a recession since 2008. Germany, the largest economy in Europe, reported a negative GDP figure for the second quarter of 2014, which took the market by surprise. France, the second largest economy in Europe, reported flat growth in its 2014 second quarter GDP release. Shortly after these negative European economic statistics were released, the European Central Bank lowered interest rates and introduced a form of quantitative easing. It is imperative that Europe gains traction and starts posting stronger growth economic figures. Current stock market prices are not pricing in a triple dip recession in Europe and this could be a stumbling block to further market appreciation. Factor 3: China Does Not Experience a Hard Landing – Recent economic data out of China has indicated a sharp slowdown… | Read More »