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The Lindsey Report


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July was an excellent month for equities: up almost 5% (as measured by the S&P 500).  In fact, the S&P has risen five of the past six weeks (6/24-8/2), gaining more than 7% during that time frame (Reuters).

Generally speaking, bonds held their own in July.  Morningstar’s Core Bond Index, which is comprised of high quality corporate bonds, mortgage backed bonds and U.S. Government bonds, was up a little less than 1%.  This is a bit of a reversal, as U.S. bonds have fallen the past three quarters, the longest losing streak since 1999 (Bloomberg).

In financial news, it is hard to escape commentary about the actions of the Federal Reserve.  As you may know, the Federal Reserve is buying $85 billion in bonds every month.  The big question now seems to be, “when will they slow down and and/or stop”, as it will likely affect both stock and bond prices.

When they begin to “taper, there are some that believe this action will negatively impact the prices of both.  The argument being that the current bond buying has unnaturally bid up bond prices, which results in lower yields (interest).  Additionally, as bond yields are so low, investors are looking to stocks to get the return they cannot get with bonds.  Therefore, this has resulted in stock prices being unjustifiably high.

I agree with part of this position.  When the FED begins to “taper”, I believe bond prices will definitely begin to fall and yields/interest rates will start to return to more, historically normal levels.  Not to be out done, the stock markets will likely have a knee-jerk-reaction and sell-off from their high levels.

However, when the FED begins to “taper” it will be because they see more stability in the economy and an improving outlook.  If their assessment is somewhat accurate, I would expect the knee-jerk reaction in the equity markets to be fairly short-lived.  Why, because even with the S&P 500 around its high, overall, equity values are still moderately priced based upon Price/Earnings ratios (i.e., profitability).

 

 

 

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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