July 17, 2014
Dear Client:
Our advice in April was “stay the course” and not much has changed since then. The stock market has continued to be strong and as normal summer trading volume is down, we continue to see nice gains in equities. We are maintaining our position at 90% equities, as we see no reason to change this. Many are waiting for the bottom to drop out when interest rates finally start to rise but we are of the opposite opinion. Many of the other economic factors are very solid. The U.S. economy added 288,000 jobs in June and combined with the other five months of the year, we have added 1.4 million jobs in the first half of 2014. These recent gains are for the right reasons too as more people have reported going back to work (from being laid off) and more people have joined the workforce. Existing home sales rose 4.9% in May, the largest increase since August 2011. Furthermore, new home sales rose by 18.6%, the largest one-month gain in 22 years. The final Thomson Reuters/University of Michigan consumer confidence index for June improved to 82.5 from the prior month’s 81.2. This is encouraging as consumers continue to spend.
Interest rates have continued to remain low and the question is for how long. The Federal Reserve would like to raise them without rattling the markets. This is tricky because their old way of raising rates will not work anymore. In past years, they would raise rates by selling bonds through its open-market operations. This makes it harder for banks to meet their reserve requirements. In relation, this would drive up demand and costs for borrowing funds overnight from other banks. This would not be helpful at the moment based on the banks’ new reserve requirements. This has led to some speculation about how the Fed will use their monetary tools. Perhaps they will raise the short-term rate. Either way, it looks like rates will not rise substantially until mid-2015. A few noteworthy points include: The Dow is up 59% from its last correction on October 3, 2011 and it is on its 33rd month without a 10% correction. On average during a Dow bull market, there is a correction of 10% usually once every 12 months.
Please call us at 952.500.8854 or 248.712.6460 with any questions about your accounts or if you are interested in our strategies.
Sincerely,
J.B. L’Esperance, ChFC