THE MARKET FUNDAMENTALS SUPPORT FUTURE GAINS
Ignore the noise; the direction of the stock market is up. We are confident that our earlier research and market view is correct. As long term investors, we focus on the fundamentals and not the noise of the day.
On October 12, I posted “Is the market headed up, down or sideways?” (http://www.kayecapital.com/financial-planning-los-angeles/is-the-market-headed-up-down-or-sideways/) At the time, market pundits were predicting 10-20% declines in the S&P 500 and investors were anxious about Ebola and economic problems in Europe, China and emerging markets. My blog opined that “…there may be further volatility and modest declines . . .” but “We believe that positive economic forces will soon lead to a resumption of the bull market.”
The market did decline further but then rallied, with the U.S. outperforming most other countries in the past two weeks and year-to-date. The S&P 500 gained 4.1% in the past week. (Source: Morningstar Direct and Bloomberg, as of 10/24/2014.) The decline helped to reduce stock prices so they were more in line with historic multiples to earnings.
We believe that the fundamentals support further potential gains over the next several months for the same reasons discussed in the chart of the 10/12/14 blog above. I listed several positive factors including strong jobs growth and lower unemployment, low interest rates, higher corporate profits, low inflation, reasonable stock prices, strong U.S. dollar and a supportive Federal Reserve. Best of all, the U.S. is the leading world economy.
The negative market concerns are still present. The short-term traders and market timers still add to the market volatility. The concerns may be different this time but market noise is normal. On balance, we believe that cash positions should be reduced, and domestic equities increased. While we can’t reasonably know the future market level, we believe that the direction for the next several months will be up.