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Lindsey Report September


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After equities experienced a fairly subdued retreat in late July through early August, they returned to rally mode, recapturing all the losses by month’s end (as measured by the S&P 500).  Moreover, the S&P 500 crossed the 2000 plateau for the first time ever. 

Currently one reason money has continued to flow into equities is due to historically low interest rates.  As we all know, the interest being earned in a money market or bank account is practically non-existent: it is borderline embarrassing to see how little gets credited to an account.  The paltry interest is not surprising when we look at yields/returns on U.S. Treasuries.  As of 9/4/14, www.treasury.gov reflected the following yields: 1-Year = .1%, 3-Year = .99% and 5-Year = 1.69%.

As we likely all agree, these yields are less than impressive.  Therefore, if one wishes to earn a higher rate-of-return or only keep up with inflation, they must look elsewhere.  One beneficiary of low rates has been and likely will continue being the equity markets.  There is speculation that the Federal Reserve will begin raising interest rates in 2015, but that is only “speculation”.  However, once that does happen, we would expect to see some monies flowing out of equities and back into fixed income.  Note: that does not mean that equities will necessarily tumble: it does mean they will have to adjust.

Equities will have to adjust to a higher interest rate environment and do what is necessary to support their valuations and remain an attractive, investment vehicle.  How do they do this?  They do it by continuing to generate profits, by paying dividends, by continuing to grow, etc….   Essentially, they must continue to demonstrate value, which will forever be the case no matter the situation.

The economic environment will have a lot to do with remaining attractive, as it is clearly easier for most companies to do well when the economy does well.  On a positive note, the Commerce Department revised upward Q2 GDP growth to 4.2% (a very strong #)!  The economy also added 209,000 jobs in July, which was the sixth consecutive monthly gain of 200k+ (the first time that has happened since 1997)!  (Reuters)  While not every report was rosy, I see the economy trotting along.  We are a long way from a gallop, but a trot is more sustainable over time. 

 

 

The opinions voiced are for informational purposes only and are not intended to provide specific advice to any individual. To determine which investments are appropriate for you, consult myself prior to investing. Past performance is no guarantee of future results.  Indices are unmanaged and cannot be invested into directly.  The economic forecasts set forth in this commentary may not develop as predicted and there can be no guarantees that strategies promoted will be successful. 

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