A SIZZLING SUMMER FOR STOCKS?

After seven consecutive monthly gains for the S&P 500 index, a string of six back-to-back monthly gains for the Dow, and a stunning string of 20 consecutive Tuesday rallies in the blue chips, markets were overdue for a pause, if not a pullback.  However, the calls for a correction or total collapse back to the lows of 2009 appear to be a bit premature. 

The Federal Reserve has kept short term interest rates at virtually zero to spur access to capital by banks and businesses.  In addition, the Federal Reserve has provided unprecedented liquidity to the system by purchasing treasury and mortgage-backed securities.  This quantitative easing program is more than four years old and, as most things, will eventually come to an end.  Worries surfaced early June that an end to the Fed’s easy money policy was near.  This week may bring clarity as the Federal Open Market committee holds a two-day meeting and press conference.  While they may signal a change, don’t expect an abrupt end to easing. 

Low interest rates helped the housing market find its footing after the free-fall of 2008.  With record low interest rates, homeowners were able to refinance and lower payments.  Those looking to buy a home found affordability more attractive.  Demand has picked up, single family home sales are at three-year highs and home builder confidence is at the best level in seven years. 

On the flip side, those low interest rates hurt fixed income investors, many of whom depend on the interest income for retirement.  After parking money in safe treasuries and earning next to nothing and watching the stock market more than double from the March, 2009 lows, some investors made the switch into stocks and may continue to do so.  That selling pressure weighed on the price of the benchmark 10-year Treasury and as prices fell the yield rose to 2.3% from 1.6%. 

Another bright spot is the labor market.  The unemployment rate rose to 7.6% in May with the economy producing 175,000 new jobs.  The strongest growth was registered in temporary and food service positions while government sector jobs continue to decline.  More encouraging would be growth in retail jobs as a function of increased demand and growth in higher-waged occupations that come as the recovery takes hold. 

Contrary to prevailing concerns, the U.S. is still the global economic and financial leader.  Faith in our currency and political process (no matter the dysfunction) still trumps that of our global competitors –China, Japan and the Euro zone.  The dollar has resumed its strength against the Yen, continuing the trend that has been in place for eight months. 

The fears of Armageddon that propelled the price of gold to $1800 per ounce have evaporated, bursting the bubble of those anticipating a decline in the dollar, a jump in consumer prices and general disaster worldwide.  Exchange-traded funds are easier to liquidate than the physical metal and the mass exodus probably exaggerated the sell off, but few can find a reason for gold to rally back to its recent highs.

Uncertainty and volatility will continue as investors review and reassess but a steady Fed and an improving economic outlook support equity prices and a continuation of the four-year uptrend. 

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